Key Takeaways
- • The SEC has launched a formal investigation into continuation vehicles (GP-led secondary transactions) used by private equity managers, citing concerns over conflicts of interest and inadequate disclosure practices that could harm limited partners.
- • In September 2023, the SEC brought an enforcement action against an adviser for breaching fiduciary duty by transferring assets between funds without proper disclosure of conflicts, investor consent, or exit provisions—establishing a regulatory precedent for continuation fund scrutiny.
- • Continuation funds have grown into a major segment of private equity activity, lauded by the industry as providing "optionality" to investors while allowing GPs to extend asset holding periods and provide liquidity in illiquid markets facing elevated interest rates and capital raising constraints.
- • The primary regulatory risk identified by the SEC centers on one fund or adviser gaining structural advantages at the expense of another fund, with particular focus on fair valuation practices and whether GPs are presenting equitable valuations in continuation transactions.
- • Continuation vehicles present ongoing fiduciary duty risks around conflicted transactions, which are expected to remain under sustained regulatory scrutiny from the SEC and institutional investors despite uncertainty surrounding new administration priorities.
Summary
The SEC is investigating the use of continuation vehicles by private equity managers as these GP-led secondary transactions have proliferated across the industry. Continuation funds—new investment vehicles created by sponsors to acquire assets from existing funds for ongoing management and control—have become embedded within private markets, particularly as macroeconomic pressures including high interest rates, market volatility, and capital raising challenges have intensified demand for alternative liquidity solutions and extended asset holding periods.
The SEC's regulatory focus stems from identified conflicts of interest and disclosure deficiencies inherent in continuation fund structures. In September 2023, the agency brought an enforcement action against an adviser that transferred assets between funds without adequately disclosing conflicts of interest to investors, securing investor consent, or allowing limited partners to liquidate or exit their investments in accordance with fund terms. This action established a concrete regulatory precedent establishing that advisers have failed to meet fiduciary duty standards when executing such transactions, signaling the SEC's intent to actively police continuation fund practices.
The core regulatory concern identified by the SEC and institutional commentators involves whether one fund or adviser receives structural advantages at the expense of another fund, with particular scrutiny directed at valuation practices. The question of whether GPs present fair value in continuation transactions remains central to regulatory investigation, as does the adequacy of disclosure to limited partner advisory committees (LPACs) and individual investors regarding the conflicts inherent in these structures.
While the private equity industry has championed continuation funds for providing investors with optionality and enhanced liquidity in stalled exit environments, institutional investors and regulatory bodies increasingly recognize that these vehicles create material conflicts of interest requiring heightened governance and transparency. Conflicted transactions remain core to fiduciary duty obligations for registered investment advisers and will continue to face sustained regulatory scrutiny, particularly from institutional investors evaluating GP alignment and governance standards.
The SEC's regulatory focus stems from identified conflicts of interest and disclosure deficiencies inherent in continuation fund structures. In September 2023, the agency brought an enforcement action against an adviser that transferred assets between funds without adequately disclosing conflicts of interest to investors, securing investor consent, or allowing limited partners to liquidate or exit their investments in accordance with fund terms. This action established a concrete regulatory precedent establishing that advisers have failed to meet fiduciary duty standards when executing such transactions, signaling the SEC's intent to actively police continuation fund practices.
The core regulatory concern identified by the SEC and institutional commentators involves whether one fund or adviser receives structural advantages at the expense of another fund, with particular scrutiny directed at valuation practices. The question of whether GPs present fair value in continuation transactions remains central to regulatory investigation, as does the adequacy of disclosure to limited partner advisory committees (LPACs) and individual investors regarding the conflicts inherent in these structures.
While the private equity industry has championed continuation funds for providing investors with optionality and enhanced liquidity in stalled exit environments, institutional investors and regulatory bodies increasingly recognize that these vehicles create material conflicts of interest requiring heightened governance and transparency. Conflicted transactions remain core to fiduciary duty obligations for registered investment advisers and will continue to face sustained regulatory scrutiny, particularly from institutional investors evaluating GP alignment and governance standards.
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