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.
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.
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.
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.
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.