E216: How the $100 Billion Continuation Vehicle Trend Is Changing Private Equity
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode features Paul Cohen, Managing Partner at Agility Equity Partners, diving deep into the explosive growth of continuation vehicles (CVs) and independent sponsor investing. Cohen reveals that the CV market has grown from $7 billion ten years ago to $70 billion in 2024, with a 30% growth rate in just the first half of this year. (00:13) The conversation explores how CVs work, why they're attractive to both GPs and LPs, and examines compelling data from HEC Paris showing CVs outperforming traditional buyouts with higher returns, faster cash distributions, and lower risk profiles. Cohen also discusses the institutionalization of independent sponsors and shares valuable lessons from his 15-year career in private equity investing.
- Main Theme: The structural transformation of private equity through continuation vehicles and independent sponsor deals, offering new pathways to generate alpha in an increasingly challenging buyout environment.
Speakers
Paul Cohen
Paul Cohen is the Managing Partner at Agility Equity Partners, where he leads investments across private equity with a focus on continuation vehicles and independent sponsor transactions. He has over 15 years of experience in private equity investing, previously working at Fort Washington before founding Agility. Cohen has built a track record of eight deals as an independent sponsor and is focused on bringing traditional buyout culture and value creation expertise to the CV market in the lower middle market segment.
Key Takeaways
Continuation Vehicles Offer Superior Risk-Adjusted Returns
According to HEC Paris's comprehensive study of 300 CVs from 2018-2023, continuation vehicles delivered higher returns than comparable buyouts while being less risky. (16:57) First quartile single asset CVs from 2018 achieved a 2.4x total value with 1.7x returned in cash, compared to buyouts at 1.8x total value with only 0.8x cash returned. The study also showed CVs had lower return dispersion, indicating reduced risk. This performance advantage stems from GPs investing in companies they know intimately, having already worked out operational kinks and identified growth levers.
Trust Your Gut When Evaluating People
Cohen emphasizes that people assessment is the most critical skill in investing, sharing a cautionary tale about ignoring red flags when evaluating a CEO who was described as "a diamond in the rough." (41:00) Despite alarm bells going off during meetings, he deferred to a more senior investor's judgment and made the investment, which later failed due to the CEO's misconduct. His mentor's advice resonates: "There's no called strikes in investing" - you can pass on deals without penalty, but bad investments stay on your track record forever.
Act Quickly on Necessary Changes
When operational changes are needed at portfolio companies, speed is essential. (42:42) Whether replacing underperforming management, cutting product lines, or reducing costs, these decisions are inherently disruptive but become more damaging when delayed. Cohen notes that management teams typically respond with relief when difficult but necessary changes are finally made, often saying "it's about time." The key insight is that by the time you recognize the need for change, you're likely already late in acting on it.
The CV Market is Becoming Capital Constrained with Strong Fundamentals
Unlike traditional buyouts where dry powder to deals done is about 4:1, the CV market operates at nearly 1:1, indicating a capital-constrained environment. (02:00) This scarcity creates opportunity for sophisticated investors who can move quickly. The market is projected to reach $100 billion in 2024, and about 15% of all private equity exits now occur through CVs versus practically zero a decade ago. The fundamental driver isn't just the lack of DPI in traditional buyouts, but GPs recognizing CVs as an optimal way to compound returns on their best assets.
Independent Sponsors Represent Untapped Alpha Generation
The independent sponsor market comprises approximately 1,500 professionals in North America doing more deals annually than dedicated buyout funds, though at smaller sizes. (24:18) This growth is driven by both supply and demand factors: investors seek better returns in lower middle market deals with deal-by-deal selection optionality, while mid-level private equity professionals leave firms to become independent sponsors due to limited partnership paths. This creates an opportunity to access high-quality deal flow with reduced competition and better economics than traditional buyout funds.
Statistics & Facts
- The continuation vehicle market grew from $7 billion ten years ago to $70 billion in 2024, representing a dramatic 10x increase. (01:13) Paul Cohen notes this explosive growth demonstrates the market's evolution from a niche strategy to a mainstream exit alternative.
- CV market grew 30% in the first half of 2024 versus the same period in 2023, reaching $50 billion compared to $31 billion, putting it on pace to hit $100 billion for the full year. (01:29) This growth rate significantly outpaces traditional private equity fund raising.
- First quartile single asset CVs from 2018 vintage achieved 2.4x total value and 1.7x cash returned, compared to buyouts at 1.8x total value with only 0.8x cash returned. (17:53) This data from HEC Paris's study of 300 CVs shows superior performance across multiple metrics including higher returns, faster cash generation, and lower risk dispersion.
