New Mountain Capital Completes $3 Billion Continuation Fund Transaction with Real Chemistry

New Mountain Capital has completed a $3 billion continuation fund transaction with Real Chemistry, offering initial investors a fourfold return. The firm retains its stake in Real Chemistry while welcoming new investors, showcasing its commitment to value creation and long-term growth. This deal demonstrates New Mountain's ability to handle complex transactions and create value for its investors.

New Mountain Capital has recently completed a $3 billion continuation fund transaction with Real Chemistry, offering initial investors a fourfold return. The firm retains its stake in Real Chemistry while welcoming new investors, showcasing its commitment to value creation and long-term growth. This deal demonstrates New Mountain's ability to handle complex transactions and create value for its investors.

The transaction involved New Mountain rolling its ownership stake, profits, and some additional capital into a new vehicle with a five-year lifespan. About 80% of the original investors chose to cash out, earning four times their money. Real Chemistry's cash flows grew sixfold to more than $250 million during New Mountain's ownership, and the firm believes it can earn another four times its money [1].

New Mountain raised $3.05 billion from a group of secondary investors led by Coller Capital, a record for a single-asset continuation vehicle. Half of the funds will be used to pay out investors, while the other half will finance Real Chemistry's growth, including acquisitions. Continuation funds typically contain just a single, top-performing company, and they often buy the companies from the original fund at the value where the private-equity firm has marked them or for a small premium [1].

Continuation funds rose to prominence in the aftermath of the 2008-09 financial crisis, when firms were stuck with assets they couldn’t sell and didn’t have enough fee revenue to sustain their operations. These so-called zombie funds restructured into new funds with a new set of investors and renewed fees. A decade or so later, firms began realizing they could use the same strategy to hold on to their best companies, earning another two or three times their money, instead of selling to a competitor [1].

Of the top 100 private-equity firms by assets under management, 70% to 80% have done a single-asset continuation vehicle, according to Nigel Dawn, global head of the private capital advisory group at investment bank Evercore [1]. The Institutional Limited Partners Association in 2023 introduced guidelines for continuation funds to address concerns, including about conflicts of interest. The recommendations included that firms provide a rationale for the move, give investors at least 20 business days to decide whether to stay in, and allow them to rollover into the new fund at the same terms as in the original vehicle [1].

This deal highlights New Mountain's strategic use of continuation funds to manage investor liquidity needs and maintain its portfolio of high-performing companies. The firm's ability to navigate complex transactions and create value for its investors is evident in this successful continuation fund transaction.

References:
[1] https://www.wsj.com/finance/investing/the-private-equity-maneuver-allowing-more-investors-to-cash-out-93321e8d
[2] https://www.livemint.com/market/the-private-equity-maneuver-allowing-more-investors-to-cash-out-11752409944198.html