Key Takeaways
- • GP-led secondary transactions and continuation funds experienced sustained growth momentum through 2025 and are projected to maintain expansion in 2026, driven by mixed macroeconomic conditions limiting alternative private equity exit pathways.
- • SEC regulatory scrutiny has intensified on continuation fund sponsors, focusing on three core risk areas: conflicts of interest, portfolio asset valuations, and transparent, timely disclosures to stakeholders.
- • Fiduciary duty litigation risk emerges from inherent conflicts where sponsors must simultaneously maximize prices for legacy limited partners while incentivizing asset transfers at attractive price points to secure carried interest upside and attract new or rolling-over investors.
- • Fund sponsors employ multiple mitigation strategies to manage conflicted incentive structures, with awareness of fiduciary obligations shaping their operational approach to secondary transactions.
Summary
GP-led secondary transactions and continuation funds have become a dominant fixture in the private equity landscape, with 2025 marking another year of significant growth that shows no indication of deceleration entering 2026. This expansion reflects the practical appeal of continuation structures for multiple constituencies: legacy limited partners gain near-term liquidity with the option to maintain exposure to seasoned portfolio assets; new investors access proven companies with considerable growth potential; and fund sponsors extend their investment horizon while capturing additional carried interest and deploying fresh capital to portfolio companies.
However, this rapid market growth has triggered heightened regulatory and litigation risk. The SEC has launched comprehensive scrutiny of continuation fund transactions, citing material concerns across conflicts of interest inherent to sponsor decision-making, valuation methodologies for portfolio assets, and the adequacy and timeliness of disclosures provided to all stakeholder groups. These regulatory concerns carry direct implications for private litigation exposure.
The core litigation risk stems from fiduciary duty claims arising from structural conflicts embedded in secondary transactions. Sponsors face dual, potentially competing mandates: they must seek optimal pricing for portfolio assets to benefit legacy limited partners, while simultaneously possessing incentives to execute transfers at compelling price points that maximize carried interest potential and facilitate capital commitments from new and continuing investors. This tension creates a fertile environment for legacy LP claims alleging breach of fiduciary duty or unfair dealing.
In response, fund sponsors have adopted varied mitigation approaches, acknowledging these conflicts and implementing governance mechanisms designed to satisfy fiduciary obligations. These strategies reflect industry-wide recognition that managing the conflict framework professionally is essential both to transaction execution and to limiting downstream litigation exposure. As continuation fund activity continues to expand, the interplay between sponsor incentives, regulatory oversight, and legacy LP protections will remain a defining feature of the secondary market landscape.
However, this rapid market growth has triggered heightened regulatory and litigation risk. The SEC has launched comprehensive scrutiny of continuation fund transactions, citing material concerns across conflicts of interest inherent to sponsor decision-making, valuation methodologies for portfolio assets, and the adequacy and timeliness of disclosures provided to all stakeholder groups. These regulatory concerns carry direct implications for private litigation exposure.
The core litigation risk stems from fiduciary duty claims arising from structural conflicts embedded in secondary transactions. Sponsors face dual, potentially competing mandates: they must seek optimal pricing for portfolio assets to benefit legacy limited partners, while simultaneously possessing incentives to execute transfers at compelling price points that maximize carried interest potential and facilitate capital commitments from new and continuing investors. This tension creates a fertile environment for legacy LP claims alleging breach of fiduciary duty or unfair dealing.
In response, fund sponsors have adopted varied mitigation approaches, acknowledging these conflicts and implementing governance mechanisms designed to satisfy fiduciary obligations. These strategies reflect industry-wide recognition that managing the conflict framework professionally is essential both to transaction execution and to limiting downstream litigation exposure. As continuation fund activity continues to expand, the interplay between sponsor incentives, regulatory oversight, and legacy LP protections will remain a defining feature of the secondary market landscape.
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