In its latest continuation vehicle, Kline Hill Partners invested alongside Presidio Investors LLC in semiconductor testing company ElevATE Semiconductor Inc.

“Every chip that’s manufactured to date before it goes into its end product has to be tested,” Kline Hill managing director Raudel Yanez said during The Deal’s Behind the Buyouts podcast. “[ElevATE is] a critical component in the semiconductor supply chain.”

The semiconductor supply chain is an increasingly attractive market for sponsors, as chips proliferate, product cycles lengthen in some markets, trends such as autonomous cars and artificial intelligence drive demand and the Chips Act pumps tens of billions of dollars into domestic fabrication to prevent shortages. Niches such as testing semiconductors or creating tools for chip lithography allow firms to benefit from the sector’s tailwind without making a massive investment in fabrication plants.

Kline Hill’s investment in ElevATE highlights another trend: growth of continuation funds.

“What we’ve seen more recently is that managers are increasingly seeking ways to hold onto their trophy assets while providing liquidity to their existing investors,” Yanez said.

Greenwich, Conn.-based Kline Hill specializes in GP-led and LP-led secondaries and has seen an uptick in deals.

“In 2018 or so, there was a turning point where continuation fund transactions got a lot of popularity,” Yanez said.

Prominent firms including Warburg Pincus LLC, Clear Lake, Thomas H. Lee Partners LP and Clayton, Dubilier & Rice LLC brought transactions to market.

Meanwhile, the pandemic, geopolitical tensions, volatile public markets and underperformance of some sectors presented challenges for exits, giving sponsors another reason to contemplate continuation funds.

Yanez discussed the nuances in the middle market and lower middle market, dynamics of pricing and sourcing transactions and the differences between Kline Hill’s GP-led and LP-led strategies.

Listen to the podcast with Raudel Yanez:

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