PE rewrites the exit rules

Welcome to this week's Capital Call - your Wednesday dose of private market insights without the jargon. At OneFund, understanding market shifts is crucial for making informed investment decisions.

Pour yourself something nice and dive in. 

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🧠 THE BIG IDEA

When Exit Doors Lock, Smart Money Builds New Ones

Something shifted this week. New Mountain Capital closed a $3.05 billion single-asset continuation fund - the largest on record. Meanwhile, 70-80% of top 100 PE firms have now executed similar structures. This isn't crisis financing. It's private equity rewriting the rules.

Here's what makes this shift noteworthy: continuation funds accounted for 13% of all PE exits globally in 2024, up from just 5% in 2021. We're not talking about distressed fire sales. These are strategic choices by GPs who believe their assets deserve longer runway to compound value.

Think of it this way: when IPO markets stay frozen and strategic buyers remain selective, the best firms don't just wait around. They build their own exit mechanisms. Secondary market volume hit $160 billion in 2024, with GP-led transactions representing the fastest-growing segment.

What's becoming clear: private equity is maturing into a true alternative to public markets rather than just a stepping stone to them. The industry that once relied on external buyers for liquidity is now creating its own.

📈 MARKET MOVERS

🏛️ Gulf Sovereign Funds Cross $1 Trillion Milestone
Saudi Arabia's PIF ($1.15 trillion), Abu Dhabi's ADIA ($1.11 trillion), and Kuwait's KIA ($1.002 trillion) have all surpassed $1 trillion in AUM. Each fund allocates 32-37% to alternatives including private equity, infrastructure, and real estate. The trio's combined focus on PE signals massive capital deployment potential ahead. Read the report →

💊 Bain and Kohlberg Lead $10 Billion Biopharma Bet
Private equity firms Bain Capital and Kohlberg are leading a new investment in PCI Pharma Services. This deal values the drug development company at $10 billion including debt. PCI supports 25% of the top 200 drugs and over 2,300 drugs in development, positioning it perfectly for AI-accelerated drug development trends. Read the details →

📈 Oppenheimer Sees Value in Beaten-Down PE Stocks
Oppenheimer analyst Chris Kotowski issued Buy ratings on Blue Owl Capital and KKR. His price targets suggest 37% and 16% upside respectively, arguing that private equity stocks have corrected from overvalued levels and their underperformance is cyclical rather than secular. View the analysis →

🌎 AIIB Provides $160 Million to BTG Pactual
The Asian Infrastructure Investment Bank closed a $160 million 7-year senior unsecured loan to Brazilian investment bank BTG Pactual. This marks AIIB's largest deal with a Brazilian private sector bank. The facility supports BTG's water and sanitation portfolio, showcasing growing ESG-focused infrastructure financing in emerging markets. Get the insights →

🔍 DEEP DIVE

The Continuation Fund Revolution: How Private Equity Solved the Exit Crisis

The traditional private equity model assumed abundant exit options. Buy a company, improve it for 5-7 years, then sell via IPO or strategic sale. But 2025 changed the game. IPO markets remain closed. Strategic buyers are selective. Tariff uncertainty created valuation gaps that make conventional exits unattractive.

Here's where continuation funds become interesting: they're GP-led transactions where firms sell portfolio companies to new vehicles they continue to manage. Original LPs get immediate liquidity, often at premiums to last valuations. Those who choose to roll over maintain exposure to assets they believe have more upside.

Why would sophisticated LPs choose this structure over waiting for traditional exits? We're seeing this solve multiple problems simultaneously. GPs avoid forced sales in weak markets. LPs get choice - immediate returns or continued participation. Secondary investors access seasoned assets with track records rather than blind pools.

The Economics Behind the Boom

The numbers explain why this strategy exploded in popularity. According to Morgan Stanley analysis, continuation funds returned a median 1.4x net of fees - slightly higher than buyout funds overall. They also showed lower losses as a percentage of initial investment.

Here's the key insight: selection bias works in investors' favor. Only the highest-quality assets make it into continuation structures. Coller Capital's $6.8 billion Credit Opportunities II fund - nearly five times larger than its 2022 predecessor - signals explosive growth in secondary markets as PE's liquidity solution.

The timing advantage is particularly compelling. Traditional secondary transactions often involve buying blind pools of assets at discounts. Continuation funds let investors evaluate specific companies with full operational visibility, management relationships, and growth plans already in place.

What Industry Insiders Are Building

TPG, Leonard Green, and New Mountain are all launching dedicated continuation strategies. When major firms dedicate resources to a strategy, it typically means the opportunity set is substantial and durable. This isn't a niche solution but a permanent feature of the private equity landscape.

The Institutional Limited Partners Association introduced guidelines in 2023 to address concerns about conflicts of interest. The recommendations included that firms provide rationale for the move, give investors at least 20 business days to decide, and allow rollover at the same terms as the original vehicle.

Where This All Leads

This trend represents private equity's evolution from financial buyer to infrastructure provider. Rather than relying on external markets for liquidity, the industry creates its own mechanisms. With $4 trillion sitting in global buyout portfolios, the scale justifies internal markets.

Think of it this way: when an industry can provide liquidity for high-quality assets without relying on external buyers, it transforms from financial engineering into value creation infrastructure. That's exactly what we're witnessing with continuation funds becoming mainstream rather than creative financing.

🧰 TACTICAL TAKEAWAYS

• Evaluate rollover decisions carefully when GPs launch continuation funds by analyzing the asset's growth trajectory, additional capital requirements, and GP's track record with extended hold periods versus taking immediate liquidity at current valuations.

• Assess continuation fund governance before committing to GPs who regularly use these structures, focusing on independent valuation processes, LP advisory committee involvement, and transparent communication about conflicts between buyer and seller roles.

• Plan for continuation fund optionality in portfolio construction recognizing these structures provide partial liquidity events that can help manage overall portfolio pacing while maintaining exposure to high-performing assets beyond traditional fund lifecycles.

🧵 WEEKEND READS

(Because some light market analysis pairs wonderfully with Saturday coffee)

• 💼 Private Equity's Plan B: Navigating the Exit Drought with Continuation Funds
  A legal analysis of how continuation funds address conflicts of interest and valuation challenges when traditional exits slow down, using New Mountain Capital's $3 billion Real Chemistry deal as a case study for proper structuring in market downturns.

• 🤖 GPs Seek to Add Value with AI-Powered Portfolios
  PitchBook's deep dive into how firms like Apollo and Eurazeo are embedding AI across portfolio companies, from procurement optimization to content creation, with only 20-25% of AI projects yielding meaningful returns despite high enthusiasm and significant investment.

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The OneFund Team

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