CV-squared: What are the risks of PE’s latest liquidity solution?
While continuation funds are a well-established PE instrument, continuation funds on continuation funds, otherwise called “CV-squared,” are a more recent proposition—and the idea is gaining traction.
The most recent wave of continuation vehicles—new funds set up to buy assets from an older fund—were primarily pitched as a way for firms to hold on to prize assets while simultaneously giving exiting LPs liquidity. However, as the first batch of continuation funds has approached maturity, exit remains elusive.
Now industry insiders say more managers are looking into the CV-squared solution. But is it a market innovation or a symptom of deep liquidity issues?
“The risk [for LPs] is that you tie up your money for another five to seven years, but there is no guarantee that at the end of that continuation vehicle’s lifecycle, there will be a buyer. You are still taking the risk that there might not be a liquidity event at the end of that lifecycle,” said David Goldstein, director of fund services at STP Investment Services.
Goldstein at STP thinks the structure should only be used for high-growth industries such as AI or blockchain, in which an asset could just be realizing its potential when it was initially purchased, and new use cases are still developing.
“[For other assets,] eventually, the LPs would just give up on it, then that becomes obviously damaging to the GP’s reputation. It also damages the relationship between the GP and the LPs. Nobody wants that, so we have all heard the term ‘cut your losses’ and just divest the asset,” he said.
Read more from David Goldstein and other experts in Pitchbook.
