Private Equity’s Latest Financial Alchemy Is Worrying Investors

Revelstoke Capital Partners utilized a continuation fund for its Fast Pace Health investment in 2020, enabling some existing limited partners to secure liquidity while avoiding a forced sale at an unfavorable price during pandemic-induced market volatility. This strategy, involving the transfer of assets to a new fund with fresh capital, exemplifies private equity's increasing use of extended holding periods, a practice that is drawing investor scrutiny.

Analysis

Revelstoke Capital Partners' 2020 use of a continuation fund for its Fast Pace Health investment highlights a significant and increasingly scrutinized trend within private equity. This strategy allowed the firm to provide liquidity to existing limited partners (LPs) by bringing in new investors, thereby avoiding a forced sale of the medical clinic chain at an unfavorable price during pandemic-related market volatility. The move effectively extends the holding period beyond a typical fund's lifecycle. However, the context of 'worrying investors' and the 'moderately negative' sentiment signal suggest rising concerns around this practice. The core issue for LPs is the potential conflict of interest, as the general partner (GP) essentially manages both sides of the transaction, which can create challenges in determining a fair valuation for the transferred asset and aligning incentives for the extended hold.

Key Decisions for Investors

• Limited partners in private equity funds should intensify due diligence on GP-led secondary transactions, particularly scrutinizing the valuation methodology and the strategic rationale for extending an asset's holding period.
• Investors must assess the alignment of interests in continuation fund deals, questioning how transfer pricing and new fee structures might benefit the GP at the potential expense of LPs.
• Given that extended holding periods are becoming more common, investors should review their portfolio liquidity models to account for potentially delayed capital distributions from private equity investments.