The private equity market is expected to quadruple in size over the next decade, according to new research from Schroders Capital.
The research says this will be the result of structural growth in the global continuation investment market, also known as GP-led secondaries. It says this will transform both sourcing and exit dynamics, as well as redefining value creation in private equity.
The private equity team’s model forecasts as a base case that, by 2034, annual exit values from continuation investments will reach over $300bn — up 329 per cent from 2024 levels. It says this will be boosted by growing investor demand, structural supply-side factors and a shift in strategy across the buyout landscape.
Schroders Capital believes there are a number of key structural factors that are driving the growth of this segment, reflecting a combination of long-term market evolution and short-term dynamics.
These include a more established route for company transformation, and the fact that not all assets require new owners. Schroders Capital analysis of around 2,600 buyout investments shows that a significant share (up to 31 per cent) of portfolio companies can be further improved under the same fund manager, making continuation investments a natural progression.
In addition that analysis highlights the cost-effectiveness of continuation funds, which typically have lower fees and more efficient structures than traditional buyout. It also says these investment tend to generate more stable returns and and a faster route to liquidity.
Schroders Capital adds that macro headwinds and reduced traditional exit routes have also increased the availability and appeal of continuation investments.
Schroders Capital chief investment officer Nils Rode says: “Even our conservative estimates show significant growth for the continuation investment market. Under more optimistic assumptions, this growth could be even higher.
“While some commentators suggest that the growth of the continuation fund market is merely cyclical, driven by a temporary drought in traditional exit routes against a challenging macroeconomic and market backdrop, our analysis suggests that 80 pee xwnr of the 2024 transaction volume for continuation investments is driven by structural growth, not cyclical effects.
“Continuation investments allow the successful transformation of portfolio companies to continue under the same fund manager when no change of control is needed.”
These transactions are made possible by lead underwriters, such as Schroders Capital, who team up with GPs and often inject new capital to help underlying portfolio companies accelerate growth and scale.
Rode adds: “The most profound disruption is not in the concept of holding companies longer under private equity ownership, that has been common for years. It instead lies in who retains ownership.
“The term ‘GP-led secondaries’ is a misnomer that leads to significant misunderstandings as the fund managers (GPs) typically retain (and often even enhance) their interest in a portfolio company and do not realise performance fees. We believe that ‘continuation investments’ is a better term to describe this new kind of investment.”
Rather than selling to another fund manager, more portfolio companies now remain with the same manager through the use of continuation vehicles, typically including new capital, enabling the continued execution of successful transformation strategies beyond traditional holding periods.
He says that as a result, these investments allow lower mid-market managers to maintain control for longer, while offering more attractive terms to lead underwriters and other new investors, compared to traditional sales from one fund manager to the next.
This development is disrupting deal flow, particularly for mid and large buyouts, where secondary buyouts (one fund manager selling to the next) have historically comprised about half of transactions.
Rode adds: “We estimate that continuation investments will displace 8 per cent of total deal flow for mid and large buyouts over the next 10 years, compared to where it would be otherwise. Under more optimistic assumptions for the growth of continuation investments, this disruption could be even bigger.”
While continuation investments are proliferating across the private equity spectrum, Schroders Capital’s analysis highlights the lower mid-market – defined as companies with enterprise values below $1 billion – presents a particularly compelling proposition, offering a broader and more diverse set of opportunities than the large buyout space.
Over the past two years, more than two-thirds of continuation fund opportunities evaluated by Schroders Capital involved companies valued under $750m.
This segment is especially attractive due to more favourable transaction economics, including lower entry valuation multiples and greater potential for transformational growth. Smaller businesses tend to have more avenues for operational improvement, geographic expansion and product innovation, enhancing the scope for value creation.
The lower mid-market also benefits from a wider range of exit routes – notably including sales to other private equity fund managers – greater resilience during periods of market stress, and less dependence on volatile public markets for liquidity.
Furthermore, Rode says these companies are often more domestically focused and service-oriented, providing portfolio diversification and reducing exposure to global market shocks.
