ILPA's CEO reveals a major disconnect: while LPs frequently take liquidity from continuation vehicles (CVs), this action is not a vote of confidence. It's often driven by practical constraints like governance hurdles, short decision timelines, and resource limitations that prevent them from rolling their investment, not a belief in the CV's merits.
Contrary to the market's growing reliance on continuation vehicles (CVs), LPs have a clear and consistent preference for traditional liquidity paths. Data shows 56% of LPs would rather see a conventional exit, even if it's below the marked value, and 40% would prefer holding the asset longer, compared to just 24% who favor a CV.
LPs are developing new selection criteria to filter managers. They will actively screen out GPs who lean too heavily on continuation vehicles as a default liquidity solution or who prioritize scaling their own firm's growth through retail capital, due to concerns about conflicts of interest and alignment.
A key frustration for LPs with continuation vehicles is the lack of a true 'status quo' option. ILPA's CEO defines this ideal as the ability to simply ignore the transaction notice without being forced to either accept liquidity or roll into a new, complex structure. This passive option is currently unavailable in the market.
The impact of retail capital is not confined to large-cap or publicly-listed managers. As Registered Investment Advisors (RIAs) seek alpha in the middle market, the influx of this capital will have a trickle-down effect, increasing competition, driving up valuations, and ultimately compressing returns for all institutional LPs, regardless of their fund strategy.
To combat mistrust in CV valuations, LPs are advocating for a concept dubbed 'schmuck insurance.' This mechanism would penalize or claw back economics if a GP sells an asset out of a CV within a short period (e.g., 12 months), undermining the original thesis that the asset required a longer hold for value creation.