Stephens Exec: Alignment Among Partners Key to Making Continuation Vehicles Work

Continuation vehicles (CV) are not for everyone, experts say, but they can be a useful tool and are gaining in popularity among investors.

It comes down to a matter of timing. If a company believes it's in its best interest to hold an asset for an extended period, then a CV can be a good strategic move.

However, during a panel discussion at the Energy Capital Conference, Laura Tyson, managing director, COO and general counsel at private equity firm Energy & Minerals Group, warned that CVs are "very complex, expensive and conflicted transactions" that should be used only as a last resort.

"If there's another sale that's unconflicted, if there's a potential to sell the whole company versus just your interest-any of those needs to be considered first," Tyson said.

Another member of that panel, Evan Smith, senior vice president, energy investment banking at Stephens, discussed CVs with Hart Energy Senior Editor Brian Walzel on the sidelines of the conference.

This interview was edited for space and clarity.

Brian Walzel: Hi, I'm Brian Walzel, senior editor at Hart Energy, and we're here at the Energy Capital Conference in Houston with Evan Smith, senior vice president, energy investment banking with Stephens, who just took part in a great panel discussion around continuation vehicle trends. Evan, thank you for joining us.

Evan Smith: Absolutely, thanks for having me.

BW: Sure. Following up on a few comments you made during your session on CV trends. So, what makes a good continuation vehicle opportunity?

ES: Sure, so there's a number of things, but I think alignment's the most important between having the GP (general partner) aligned with the existing LPs (limited partners), new LPs coming in. I think the most key is having a clear value creation bridge, right? So, you have to have a reason why this makes sense to sell this over a three- to five-year period from now versus selling today, right? The GP has to convince their existing LPs and new LPs that it doesn't make sense to sell today and having a true story is really what sets apart good CVs from bad ones.

BW: So, what characteristics make an asset a continuation vehicle candidate rather than a traditional sales candidate?

ES: There's a number of things, but I think mostly it's when there's not a robust M&A market in that area and you're able to achieve value in an asset by holding it for a number of more years, right?

So, a lot of ones you see where there's undeveloped inventory, the M&A market isn't giving them credit for that today. So, by holding the asset for however many more years-three to five more years-you're able to convert that inventory into production, realize more in terms of proving out the position, ultimately achieving a greater value for the overall shareholder base.

BW: Sure. And last question here: does the rise of CVs suggest private energy capital is becoming more permanent capital?

ES: I think in some way. I think you're still going to have private equity funds that have 10-year hold cycles, they're still going to cycle in most of their portfolio companies within that period, but we're seeing a lot of family office interest in this continuation vehicle transaction type.

We're seeing companies, in general, are having longer hold periods, they're developing assets more. It's not acreage flips anymore. So, in general, you're holding assets longer and that can lead to a situation where a CV would make more sense.

BW: Sure, well, Evan, appreciate your time and thanks for your insight.

ES: I appreciate y'all having me.

BW: And thank you all for watching.

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