Goldman Sachs Group Inc. and Evercore Inc. have begun gauging investor interest in structures that let private equity managers retain portfolio companies well beyond a standard fund's lifespan. Jefferies Financial Group Inc., Raymond James Financial Inc. and Lazard Inc. are part of the effort, trialing formats for specific investor groups, say people with knowledge of the discussions.
Representatives of Goldman, Evercore and Jefferies said they had no comment.
Selling has been harder with higher borrowing costs and weaker valuations, so managers have leaned on tools that slow exits while still returning cash. Continuation funds have become a go to, and in some cases assets have been moved from one continuation fund to the next - so-called CV squared deals - to prolong ownership yet again.
Evergreen continuation vehicles - often called forever funds - push further by taking away a core limit of traditional private equity funds, which usually have fixed lives. Conventional continuation funds typically run five years with two optional one year extensions, while in this version managers could move holdings into vehicles with 10 to 15 year lives. "We're at the very early stages of this emergence of permanent capital CV," said Raymond James's global head of private capital advisory, Sunaina Sinha Haldea, in an interview. "These vehicles will have more unfunded capital to support the growth of the asset, and there is no pressure to exit." Lazard's global head of private capital advisory, Holcombe Green, said the design will shift over time, noting, "These funds will not have a defined structure because they will be customized."
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Placing holdings into evergreen continuation funds may draw heightened scrutiny of carried interest - the manager's profit share - and of investor exit options, according to people familiar with the deliberations. Those people also said investors may look for higher revenue and growth potential.
Options under consideration include distributions financed by the portfolio assets themselves or by fresh commitments from new investors, according to some of the people. Bankers are also looking at tender offers that give investors a way to sell their positions and at stapled arrangements where a departing investor exits and simultaneously commits capital into a new fund, according to the people.
Continuation funds already have scale, accounting for just under 50 percent of the $121 billion in secondary transactions in the first half, per Evercore. The new evergreen versions under discussion would aim to extend ownership to 10 to 15 years, with customization and liquidity features still being hashed out. The bottom line: timelines and exit mechanics are the focal points to watch as these vehicles take shape.
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