In Conversation with Prof. Kobi Kastiel

Dr. Tom Gosling interviews Kobi Kastiel, Professor of Law at Tel Aviv University and ECGI, on his paper, 
"The Rise of Private Equity Continuation Funds", co-authored with Prof. Yaron Nili of University of Wisconsin-Maddison.

The key discussion points are:

     ▪️ Private equity continuation funds arise when the PE General Partner (GP) takes some or all of the assets of a PE fund and sells them to a new fund run by the GP whose term may exceed the initial 10 year term.

     ▪️ Although Limited Partners in the original PE fund can choose to buy into the continuation fund, 80%-90% of them do not.

     ▪️ Continuation funds can offer advantages for LPs and GPs in terms of liquidity and option to retain assets until an optimal external sale point, but they also give rise to significant conflicts of interest between the GP and different classes of LP.

     ▪️ Protections in place for existing LPs in the fund are generally insufficient to mitigate these conflicts and, in particular, market disciplines do not appear to operate effectively.

     ▪️ Many LPs do not have the time, expertise, or resources to assess the value of continuation fund offers, often at short notice, and so can feel compelled to sell, creating the suspicion that the deals are more beneficial for the GP and new LPs than for the exiting LPs.

     ▪️ Legal routes of redress are rarely pursued for fear of falling out of favour with influential GPs.

     ▪️ The SEC rule requiring a fairness opinion for continuation funds simply creates different conflicts of interest and satisfies neither GPs nor LPs.

     ▪️ Instead, the authors propose empowering LPs, as opposed to just the Limited Partner Advisory Committee, when it comes to approval of continuation funds.

     ▪️ The presence of conflicts of interest in continuation funds create challenges for private equity investors, especially small to mid-size pension funds who may be challenged in relation to time and resources to evaluate continuation fund offers.

ECGI Conversations is an interview series aimed at uncovering valuable insights, ideas, and perspectives from cutting-edge academic research. Hosted by ECGI Executive Fellow, Dr. Tom Gosling, this series delivers engaging discussions with leading experts in the field.

The ECGI Conversation Series is part of the Responsible Capitalism initiative. 

For more interviews in this series, visit this page.