📉 Chinese PE Firms Use Continuation Funds to Avoid Losses!

🐺 Hi pack-mates,

This is Howling Markets, the newsletter than grants continuation in your financial learning journey!

Today we will be covering:

• Education: What Are Continuation Funds? 💸

• Uniswap Surges to its 2-year High 📈

• Chinese PE Firms Use Continuation Funds to Avoid Losses! 📉

• Equity and Debt Markets Daily Update ⚖️

• And more

Market Watch 👀

Education: What Are Continuation Funds?

The Private Equity (PE) niche is one of the oldest financial sectors in our economy and, over its long years of history, it has continuously evolved to improve its efficiency and provide new solutions.

The private equity sector is also one of the most illiquid in the financial markets and it is composed by limited partnerships that pool investors’ money to invest in private companies. Usually, for these types of investments the limited partners pledge their assets for a period of 10 years after which the PE firm should liquidate their position and payout any potential profits.

One of the newest phenomena of private equity are continuation funds, which can be defined as secondary limited partnerships which can be used by the main fund to roll over their positions and close difficult-to-exit investments.

Essentially, these continuation funds are limited partnerships created by the PE firm to which they can sell their own positions to renew the 10-year term of their investors.

Additionally, these funds have become extremely useful to PE firms as they allow them to let their investors lock in eventual profits and to gather new interested limited partners during the sale from one fund to the next.

However, this new financial practice has raised a lot of attention especially for its downsides. The major issue with this practice is the conflict of interest that it is raised when selling something to yourself. In these cases, are the fund managers who determine the price, will also be the ones purchasing the entire investment vehicle through the continuation fund.

Because of this, the managing partner at Navis Capital has commented on the issue by saying “At best, there’s an appearance of a conflict of interest. At worst, there is a real conflict of interest”. However, despite this delicate aspect, continuation funds are extremely useful and they are helping Chinese Private Equity firms to avoid losses, at least on paper.

Uniswap Surges to its 2-Year High

Uniswap, the governance token of the homonymous Decentralized Exchange (DEX), has rallied over +150% since the beginning of February thanks to the great improvement which has been announced by the Uniswap Foundation (UF).

The foundation had announced on the 23^rd of February that it wanted to reward the holders of its token and that it wanted to improve their protocol to include a better fee redistribution. The goal would be increasing the involvement of the token holders through a reward system based on staked and delegated tokens.

These changes and the increased involvement have been well received by the UNI community and, on the day the announcement was posted on X, the price rallied over +54% in a single day.

This last rally increased the market capitalization of the token almost by half just during the past week, reaching $9.4 billion in market capitalization and becoming the 16^th largest cryptocurrency in the world.

Additionally, UNI’s trading volumes have surged by more than +120% over the last 24 hours, breaching the $1 billion daily trading volume barrier.

Today’s Howling Question

And now, it is time for our howling question!

It has passed quite some time since the last time we discussed about Chinese equities. How do you think they are holding up after the snowball disaster? How did the CSI 500 perform over the past month?

1. -7%

2. -1%

3. +5%

4. +12%

5. +18%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Chinese PE Firms Use Continuation Funds to Avoid Losses!

We have briefly discussed how continuation funds can be used by PE firms to roll over their limited partners’ positions, lock in potential profits and to gather new investors. However, in most other cases, continuation funds are also used to avoid incurring a significant loss at the maturity of the investment vehicle.

If a PE fund has accumulated $1 billion in losses over the years and, due to the proximity of the vehicle’s maturity, it has to liquidate its positions, the fund would transform its potential loss into an actual one. However, most funds have the possibility to roll over their theoretical losses by selling the AUM to a continuation fund.

However, in China this practice has also become extremely common for profitable investments due to the poverty of its stock market. Most PE firms exit their investments either through an M&A or through an IPO, but due to the underperformance of Chinese equities, neither of these two alternatives might be enough to really raise the amount that the investment is worth.

Because of this, most PE firms sell their investment to their own continuation fund at the price their believe to be accurate, raising the money needed to payout any exiting investors and closing difficult-to-exit positions.

To avoid the obvious issue of the conflict of interest, most fund managers solicit more than 50 investment valuations from institutional investors and then they pick the highest number as the selling price for the AUM.

However, many investors have been criticizing these practices and comparing them to the asset loopholes created by Ponzi schemes. Were you aware of continuation funds? What do you think about them?

Equity and Debt Markets Update

And now, our daily markets update!

Thursday has been a great day for the US stock market as investors kept thinking about the positive announcements made by Powell during the previous trading session. The SPX gained an additional +1.03%, setting a new all-time high at 5,157.35.

On the other hand, Thursday has been a much less volatile session for the bond yields. The 10-year US government bond yield benchmark only fell by -0.46%, approaching the next support level at 4% as investors are starting to price in lower interest rates in the future.

Answer

The correct answer is e) +18%.

After the ruinous fall caused the snowball derivatives’ losses, the promise of government aid made by the Chinese market authority was enough to prop the market higher, gaining +18.32% over the last month.

Howl-Worthy Memes 😂

🐺 See you next time!

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