Energy Year-end Series | Continuation Vehicles

Continuation vehicles have quickly moved from niche to mainstream in the energy sector—and Stephens has been at the forefront of that evolution. In this feature, members of Stephens’ Energy Investment Banking team break down why continuation vehicles are gaining traction, how they can help address complex ownership and valuation challenges, and what makes them a compelling option for sponsors, management teams, and investors.

Drawing on real-world case studies from select transactions, the discussion explores when continuation vehicles might make sense, how alignment among stakeholders is achieved, and why institutional investors and family offices are increasingly drawn to these structures. The team also shares insight into valuation dynamics, investor demand, and why continuation vehicles are becoming a core part of the exit toolkit for energy sponsors in 2026.

Watch the full feature for an inside look at how these transactions are executed, what can drive successful outcomes, and why continuation vehicles may be poised to play a meaningful role in energy M&A going forward.

Full Video Transcript

Evan: Good afternoon. This is Evan Smith with the Stephens Energy Investment Banking Team, here for our year-end recap. Before we start the discussion, I'd like to introduce Keith and Brad from our energy team to share their backgrounds.

Keith: Hi, I'm Keith Behrens. I run the energy investment banking group at Stephens. I've been here for 17 years and look forward to the discussion today.

Brad: Good afternoon. I'm Brad Nelson, head of the A&D group within the energy platform here at Stephens. I have also been at Stephens for 17 years with Keith.

Evan: Great. Our first topic is continuation vehicles. Continuation vehicle transactions have had an increasing role in the energy space, particularly in the last 12 to 24 months. What has made these transactions more mainstream or accepted in the market?

Keith: I'll start, and then Brad can add. About 10 continuation vehicle (CV) deals have been done in the upstream space; we closed two this year: the MAP deal, roughly a billion dollars, and the PennEnergy deal, around two billion dollars, making it the biggest upstream CV to date. Several factors are driving these transactions. In cases like PennEnergy, there's significant upside that an outright sale process wouldn't fully value. A CV allows the GP and the company to capture that future upside as part of a recapitalization. If a deal or asset base has a lot of upside and you anticipate not getting full value in a sale transaction, a CV provides a strong alternative option.

Factors Driving the CV Market

Brad: To add to that, CVs have been quite common in other industries for the last five to seven years, and those transactions were generally successful with high-quality companies. This established case studies in other sectors. Initially, the buyers were mostly institutional generalist investors seeking good ways to deploy capital and provide solutions to companies. As relative valuations in other industries increased, the energy industry's remained flat. Institutional investors led the demand, driving more institutional equity-driven CVs. As Keith noted, there have been about 10. Family offices have started following these institutions. CVs are a strong fit for issues companies face, particularly as a good solution for mixed or complex ownership where some investors seek a liquidity event while others wish to remain invested.

Evan: That makes sense. Diving into the two CVs we've done this year, while they share themes, each solved a different situation for the GP. Looking back, what made each of those deals particularly successful?

Success Stories: MAP and PennEnergy

Brad: We'll start with MAP, as I alluded to. It was a high-quality company that had aggregated a substantial mineral royalty portfolio over roughly 35 to 40 years. Management and ownership considered the portfolio construct almost impossible to replicate. They had a strong platform providing significant cash flow and high growth. Some investors had been with the MAP team for about 30 years, and quite a few were looking for a liquidity event. The CV was an excellent solution to "hit reset" with the company and the new management team. Investors had the option to stay in the deal or monetize all or a portion of their stake. It was a good solution for a company that had been around for nearly four decades, enabling them to move to the next step.

Family Office Participation in CVs

Keith: The second deal was PennEnergy, a Marcellus player. The GP and the company believed gas prices would rise beyond their exit timeline, a thesis that has already played out since gas prices increased after the deal closed. PennEnergy also had a substantial inventory of future drilling opportunities. When evaluating options, selling was one, but the management team and inventory were in place, and gas prices were not at their desired level. There was also a significant upside that an outright sale would not fully value. They chose a CV, and the thesis has proven correct with the rise in gas prices. In both CVs, family offices participated substantially: roughly half the equity capital in the MAP deal and a significant portion of PennEnergy's equity commitments came from family offices. CVs are ideal for these investors, as they share the long-term hold thesis to capture rising gas prices. They appreciate having an established team and drilling opportunities in place. This creates a perfect scenario for their investments.

Brad: To elaborate, the CVs we've participated in, and others we're discussing, are positioned as outright sell sides. These are not "old school" secondaries where groups get a discount. When considering the materials and analytics for these transactions, the valuations are fair, fully valued, and fully priced. This makes the CV a compelling option for existing shareholders and management in relation to a sell-side valuation.

Keith: To reinforce Brad's point, while we discuss not getting full value in an outright sale, these CV deals are executed at market valuations; they are not discounted or distress-type valuations. They are compelling valuations. However, as in the PennEnergy case, there is upside value that an outright sale likely wouldn't capture, but this does not imply a distress valuation. Family offices are critical in driving successful outcomes. There are about 15 institutional groups actively investing in CVs, but we bring a long list of family offices who favor these structures, helping to drive competitive tension, favorable terms, and strong valuations.

Brad: In both cases, we found substantial investors who appreciated the historical track record of both management and the GP. They are essentially long-term holders of the asset class, looking to stay in for five to 15 years. The demand was strong based on the companies' historical performance.

Evan: This structure is a good fit for family offices, as they move away from blind pool funds toward the direct single-asset investment in an established platform. Moving to the strategy and nuance of these deals: alignment in continuation vehicles is frequently discussed, involving the sponsor, management, and new investors. How did alignment play out in our deals, and more generally, how do you ensure it is present?

The Importance of Stakeholder Alignment

Keith: Alignment is crucial, especially with family office investments. Many of our family offices are non-oil and gas investors who have recently decided to enter the sector. They want to avoid a poor initial investment, making alignment paramount. In the PennEnergy deal, alignment was confirmed by INCAP's upstream fund 12 making a large investment as the second biggest investor. Any other individual investor's commitment would likely be smaller than INCAP's, demonstrating perfect alignment. A key aspect is the GP not only rolling their investment and keeping capital in the deal, but also making an additional investment into the CV.

Brad: Alignment is central to all CVs. You have an existing shareholder base, a GP, a management team, and new investors to satisfy. All parties must be happy with the situation and the valuation. Once structured, the deal must ensure alignment among the new investors, the GP, and the management team, appropriately incentivizing the GP and management to continue their work. Alignment is a primary consideration for us.

Evan: Stepping back, when advising a GP in discussions or board meetings, give people a look at how we evaluate which deals make sense to take on. How do you determine if a deal is a fit for a CV or a strong fit for our investor sources?

Evaluating Potential CV Candidates

Keith: That's a good question. As Brad mentioned, there are many parties involved, leading to potential conflicts. The ideal scenario is when the CV valuation is close to the strategic sale valuation. These two valuations typically differ due to the present value of the G&A burden. A large difference increases the potential for conflicts. In secondary play areas like the Midcon or the Rockies, where the A&D market is less active, the two valuations often converge, which is why we've seen so many CVs there. Conversely, in the Permian, for example, with a highly active A&D market, a large difference in valuations might prompt a decision to sell outright rather than pursue a CV.

Brad: I agree. While it may be cliché, the first things we look at when a new opportunity arrives are the management team's history and track record, followed by a deep dive into the assets. We market these transactions to sophisticated energy investors and to family offices who are generalist investors, meaning we must articulate a compelling story within the energy landscape. Once management is vetted and has a strong background, we look for an asset base that is not overly complicated to underwrite. We avoid situations across four or five basins that are difficult to pick apart or where future capital allocation is unclear. We seek a clean story, with a solid level of production and cash flow, but with significant repeatable upside, similar to the PennEnergy deal. They had drilled many wells in a central core area and planned to continue that with new capital and cash flow. We look for a clean set of assets.

Keith: I echo that. One core area is ideal, although two is acceptable. As Brad noted, you should be able to present a drilling program for the next three to five years, backed by analogies from 50 or more wells already drilled. This allows for comfort with the well performance forecast. While commodity prices remain a factor, many investor groups are bullish on natural gas prices, making that aspect easier to understand. Key requirements are a simple story, a simple asset base, carrying forward a proven drilling program, good alignment, and an appropriate valuation. These are the key boxes to check.

Evan: Those characteristics have led to the quality and premium pricing we've seen. Touching on price discovery, GPs and LPs often have different views on approaching a CV. What works best for executing a deal at a level that satisfies all parties?

Valuation and Price Discovery Strategies

Brad: It starts with extensive communication between our team, the existing management team, and the GP regarding valuation. We conduct substantial internal work to determine our view on the valuation and what we believe the market will value the deal at. Alignment is key, and we ensure we are aligned with our management team first. Additionally, before going to market, we effectively write the equivalent of a fairness opinion by examining A&D comps, corporate comps, and Net Asset Value (NAV), leaning most heavily on NAV. We share this work with clients to confirm alignment; if achieved, we believe we have a transaction the market will favor.

Keith: Our views on valuation are usually sufficient, as our clients value them highly. However, in some cases, extra sensitivities may necessitate a market check. For instance, a GP may want to execute a CV but needs a sale process to ensure LPs are comfortable with the CV's strike price versus a strategic outright sale valuation. We have executed two parallel processes, running a sale process concurrently with a CV process, allowing us to compare the resulting valuations and decide which route to take based on the bids.

Evan: Perfect. Regarding investor mix, we've seen strong family office interest. Beyond that, what is the broader universe of investors in CVs, and why is this deal structure a strong fit for families?

Institutional vs. Family Office Interest

Keith: On the institutional side, 15 to 20 groups are active, including household names and new funds focused primarily on upstream CVs, or energy broadly. This segment has become more efficient. On the family office side, 15 to 20 groups can anchor a deal, and 50 to 100 investors participate following a quality anchor. Most of our family office list consists of non-oil and gas groups, covered by a separate financial sponsors coverage group at Stephens that covers about 400 family offices. These groups invest $20 to $200+ million per deal. A common fear is that family offices take too long to complete an evaluation, but our experience is the opposite. They conduct thorough evaluations but typically lack deep teams, so they rely on Brad's team of five petroleum engineers and one geologist to move through the process quickly. We have two examples of $200+ million investments where non-oil and gas family offices went from their first meeting to approval by their investment committee in less than 30 days. This is a quick turnaround and counters the common fear about family offices.

Brad: To discuss transaction size, the sweet spot is generally $250 million up to $1.5 billion, or even $2 billion, in enterprise value. It's important not to go too small. If a CV has an enterprise value of $250 to $300 million and only half the shareholders sell their stake, you are raising $125 million or more. Deals must be sizable enough to attract a lead investor. While a lead investor might take the whole deal, if a syndicate is involved, there must be enough capital and need for a lead investor with room for a syndicate to follow. Smaller deals can be completed, but they become more complex.

Evan: That makes sense. As we wrap up and look ahead, it's clear these deals are now standard in the toolkit for sponsors as one of many exit alternatives they evaluate. Do you see that trend continuing next year? What GP dialogue or insight are you hearing as sponsors head into next year?

Future Outlook for Continuation Vehicles

Keith: The trend will certainly continue. It's driven by a long list of "long-in-the-tooth" portfolios in various PE funds. There's a substantial number of 8+ year-old companies that either couldn't sell or disliked their valuations. Many of these groups will look at CVs as an exit option to reset the clock. There are many quality opportunities, and the process has become more efficient. When we take deals to market, there are more institutional and family office investors. It's a strong structure, and we anticipate seeing more of these deals.

Brad: As mentioned, CVs are an excellent solution for complex ownership situations where some investors wish to stay in and others want to monetize. The CV phenomenon is still relatively new to the energy industry, although it's been common in other sectors for some time. It will continue in the energy industry. We will still see regular M&A, but the CV transaction will likely take a greater share.

Evan: Thank you all for the insight. That wraps our continuation vehicle segment.

Keith/Brad: Thanks for your time.