Private Equity Funcast: "Continuation Vehicles 101 with Houlihan Lokey"

Date: May 6, 2025
Hosts: Devin Mathews, Jim Milbery (ParkerGale Capital)
Guest: Samir Shamsi (Co-Head, GP Led Secondaries at Houlihan Lokey)

Episode Overview

This episode offers a comprehensive exploration of continuation vehicles and the evolution of the private equity secondaries market, with a focus on GP-led transactions. Devin and guest Samir Shamsi break down industry jargon, trace the history and institutionalization of secondaries, and share practical insights into how continuation vehicles work, how they're structured, and the key players involved. The discussion is candid, with humor and real-world anecdotes, targeted at practitioners and newcomers alike.

Key Discussion Points & Insights

1. Samir Shamsi’s Background and the Evolution of Secondaries

• [02:03] Samir shares his unconventional journey from Chicago suburbs, through Columbia, and into the world of finance, landing in GP-led secondaries after stints in management consulting, LBO banking, and secondary advisory.
• [04:00] The secondary market was “boutique-y and catch-as-catch-can” just 15 years ago—a $9 billion market that has since grown 15-16x.
• The increased institutionalization: now, even undergraduates are reaching out to learn about secondaries, reflecting industry maturation.

2. A Brief History of Secondaries (LP- and GP-led)

• [06:54] Samir traces LP secondary origins to corporate VCs seeking liquidity in the late '80s/early '90s.

• The field shifted from basic matchmaking to institutional, M&A-style processes as banks and institutional investors sought liquidity, especially post-2008 financial crisis.

• [09:38] Key catalysts:

  • Regulatory pressures post-crisis forced banks to divest PE portfolios.
  • LP secondaries became an established path for institutional rebalancing.

• [11:33] GPs realized secondaries could benefit themselves—attracting new partners, extending asset holds, and managing trophy assets beyond conventional fund timelines.

  “The secondary investor universe had also become institutionalized…sponsors realized this was a great way to hold on to high quality assets that they didn’t want to sell.”
  —Samir Shamsi [12:45]

3. Changing Perceptions: From Stigma to Standard Practice

• [14:23] Early secondary deals were viewed with suspicion (“Secondaries was a four-letter word”), but the tool is now standard and even celebrated via press releases.
• The market is now $200B in dry powder (dedicated capital for secondaries), with use cases expanding rapidly.

4. Industry Jargon Demystified

Devin and Samir clarify the core terminology:

• LP-led secondary:
  • A limited partner sells its fund interest to another LP, often a secondary fund (e.g., a state pension selling its LP stakes for liquidity).
  • Transactions can span single interests or massive portfolios (e.g., 346 funds in one deal).
  • Pricing hinges on asset value, duration, and prospective returns.

    “You’re buying an index of private equity across managers, vintages, and strategies.”
    —Samir Shamsi [19:30]

• GP-led secondary:
  • Initiated by the GP, often to move an asset from an older fund into a new vehicle managed by the same sponsor (“continuation fund”), giving GPs and supporting LPs more runway with star assets.
  • LPs can exit at a set price, or roll their interest forward, typically with flexible options (all, none, or partial).
• Continuation fund:
  • “It’s like a renewal of your vows—it’s a doubling down for four or five more years” [22:29].
  • Management fees and carry are re-set, often on a larger base, creating alignment between GPs and new investors.
• A NAV loan:
  • Mentioned briefly; typically a leverage solution referencing the net asset value of a fund’s portfolio.

5. Deal Mechanics: How a Continuation Fund Works

• [23:36] Hypothetical example:

  • Company bought for $25M, now valued at $100M, with the option for LPs to cash out or roll forward.
  • Most LPs now opt for cash when price is fair, with sell rates around 90% in recent years.
  • GPs typically “crystallize” carry at the sale, but are required to roll proceeds into the new vehicle to ensure alignment.
  • Typical economics:
    • Management fee: ~1% on net invested capital.
    • Tiered carry: 10% over 8% IRR, 15% over 15%, 20% over 20%. Sometimes more (“super carry”) for exceptional returns.

  “The starting point for these discussions…is the best way to manufacture alignment is by making sure the sponsor has skin in the game and isn’t taking any chips off the table.”
  —Samir Shamsi [28:03]

6. Critiques & Concerns Around Continuation Vehicles

• Concerns include:
  • GPs “selling assets to themselves” rather than maximizing price in the open market.
  • Potential for “fee grabs” (re-setting management and carry).
  • LPs missing on future upside if GPs re-sell the company for much more later.
• LPACs (advisory committees) now provide oversight to ensure fairness; best practices include early and open communication.
• “If the GP is being responsible and engaging their LPAC early, these things work well. But there are times it’s contentious.” [34:16]

7. Management Team Considerations in Continuation Vehicles

• Management is critical—alignment is necessary for LPs, new and old.
• “It’s seen as the right thing to do to pay out management and create a new incentive plan for the go-forward period.”
• Most management teams “vest in the old plan” and roll “2/3 to 70%” of their stake, with some rare cases going up to 100%.

  “No LP is going to commit to a continuation fund if they don’t think management is happy, aligned, and incentivized.”
  —Samir Shamsi [40:22]

8. Multi-Asset Continuation Vehicles and Specialization

• Multi-asset vehicles can package multiple companies (sometimes from different funds or vintages).
• Buyers are savvy—“You can’t hide stinkers,” but solutions exist even for challenged assets (special situations investors).
• “There are so many flavors [of secondaries] now; if you’re creative and smart, you can own a slice of it.” [45:45]

9. Market Outlook and Use of Continuation Vehicles in Volatile Times

• In times of uncertainty (e.g., tariff disruptions, volatile IPO markets), GPs and LPs are using continuation vehicles more creatively to provide liquidity without a full-blown exit.
• “The inbound activity has really blown up in recent weeks.” [49:46]

Notable Quotes & Memorable Moments

• On industry change:

  “We’ve gone from being shunned… to sponsors issuing press releases to trumpet successful continuation fund processes.”
  —Samir Shamsi [14:23]

• On process alignment:

  “You’re basically doubling down on this partnership for four or five more years… it’s like a renewal of your vows.”
  —Samir Shamsi [22:29]

• On management treatment:

  “It’s officially a change of control. It’s seen as the right thing to do to pay out management and to create a new agreement for the go forward period.”
  —Samir Shamsi [39:10]

• On the market’s sophistication:

  “If anybody thinks they can do a single asset continuation vehicle with a turd, that’s not going to happen. I mean, it’s been done, but…”
  —Devin Mathews [44:23]

Timestamps for Key Segments

• [02:03] Samir’s path to secondaries
• [06:54] The history and early days of secondaries
• [09:38] Financial crisis as a catalyst
• [11:33] GPs' adoption of secondaries
• [14:23] Mainstreaming & market size
• [17:05] LP-led secondary explained
• [20:15] GP-led secondary & continuation funds explained
• [23:36] Mechanics of a GP-led continuation fund
• [27:31] Crystallization and alignment of carry
• [29:10] Fund economics in continuation vehicles
• [32:56] Criticisms and governance/best practices
• [37:25] Management’s role and alignment
• [41:45] Multi-asset continuation vehicles
• [46:48] Market specialization and evolution
• [48:16] Current market dynamics: tough climate, more secondaries
• [51:01] How to contact Samir / CV101 for CEOs

Conclusion

This episode serves as a practical masterclass in private equity secondaries, unbundling the jargon and laying out the real-world motivations, mechanics, and best practices behind continuation vehicles. Samir and Devin emphasize the maturation of the secondary market, the normalization of GP-led deals, and the broadening toolkit available to sponsors and LPs alike—especially valuable in a volatile market landscape.

Contact Info:
Samir Shamsi (Houlihan Lokey) — SShamsi.com; easy to find, open to informal educational calls ([51:01])

If you want to understand why continuation vehicles and GP-led secondaries are now core tools in the PE world’s toolbox, this episode is an essential listen or read.