Continuation vehicles have become one of the most important liquidity solutions in today’s private equity market. They have also become one of the SEC’s newest enforcement priorities.
According to multiple reputable industry reports, the SEC’s Division of Enforcement has opened a formal investigation into certain continuation vehicle transactions, with investigators reportedly examining conflicts of interest, valuation practices and investor disclosures. Although the SEC has not publicly announced the investigation or alleged any wrongdoing by any adviser, the reported inquiry serves as another reminder that GP-led secondary transactions remain an area of significant regulatory risk.
Why Continuation Vehicles Matter
Continuation vehicles have grown rapidly as sponsors seek alternatives to traditional exits amid a slower M&A and IPO environment. These transactions allow one or more portfolio companies to be transferred from an existing fund into a newly formed investment vehicle, giving existing investors the option to either receive liquidity or continue their investment alongside new investors.
While these transactions can create meaningful benefits for investors and sponsors alike, they also present one of the clearest examples of the fiduciary conflicts inherent in the private fund business.
The adviser is often simultaneously:
- Selling an asset on behalf of the existing fund;
- Managing the purchasing continuation vehicle;
- Advising investors deciding whether to sell or roll their interests;
- Negotiating transaction terms; and
- Continuing to earn management fees and potential carried interest on the transferred asset.
Because the adviser occupies multiple roles throughout the transaction, the SEC has historically viewed continuation vehicles as requiring heightened attention to fiduciary obligations and conflict management.
Reported Areas of SEC Focus
According to industry reporting, the SEC’s investigation is centered on three primary areas.
Valuation
Valuation has long been one of the SEC’s highest-risk examination priorities for private fund advisers, and continuation vehicles place valuation directly at the center of the transaction.
Investigators are reportedly examining matters such as:
- The methodology used to determine transaction pricing;
- Whether valuation assumptions were reasonable and consistently applied;
- The role of third-party valuation firms or financial advisers;
- Changes in valuation methodologies leading up to the transaction; and
- Documentation supporting the final transaction price.
The SEC is unlikely to second-guess every valuation judgment. Rather, advisers should expect regulators to focus on whether the valuation process was thoughtful, well-documented and supported by appropriate governance.
Conflicts of Interest
Continuation vehicles create structural conflicts that cannot simply be eliminated—they must instead be appropriately managed and fully disclosed.
The SEC is reportedly evaluating whether advisers adequately identified and addressed conflicts arising from:
- Negotiating on behalf of both selling and purchasing funds;
- Financial incentives associated with extending ownership of successful portfolio companies;
- Fee and carried interest arrangements;
- Relationships with secondary investors; and
- Internal governance surrounding approval of the transaction.
From the SEC’s perspective, the existence of a conflict is rarely the issue. The adequacy of the disclosure and the effectiveness of the conflict management process are often far more important.
Investor Disclosure
Perhaps the most significant focus appears to be whether investors received sufficient information to make an informed decision.
Among other things, advisers should consider whether investors clearly understood:
- How the transaction price was determined;
- Material conflicts affecting the adviser;
- The alternatives available to investors;
- Fees and economics associated with the continuation vehicle; and
- The overall rationale for the transaction.
Complete, balanced and transparent disclosure remains one of the SEC’s primary expectations under an adviser’s fiduciary duty.
A Continuing Regulatory Theme
The reported investigation should not come as a surprise.
Although the SEC’s 2023 Private Fund Adviser Rules—which would have required fairness or valuation opinions for adviser-led secondary transactions—were vacated by the Fifth Circuit in 2024, the Commission has consistently emphasized that advisers remain subject to the Advisers Act’s fiduciary duty and anti-fraud provisions.
In other words, while the specific rule requirements are no longer in effect, the SEC continues to expect advisers conducting continuation vehicle transactions to appropriately manage conflicts, maintain robust valuation processes and provide investors with clear and complete disclosures.
This reported investigation suggests that the Division of Enforcement intends to evaluate those obligations using its existing statutory authority rather than relying on the vacated rules.
Practical Takeaways for Private Equity Advisers
Sponsors contemplating continuation vehicle transactions should consider whether their existing policies and transaction processes adequately address regulatory expectations. In particular, firms should evaluate whether they:
- Maintain a well-documented valuation process that supports the transaction price;
- Clearly identify and analyze all material conflicts of interest;
- Prepare comprehensive disclosure materials explaining pricing, conflicts and investor options;
- Appropriately involve LP advisory committees or other governance bodies where applicable;
- Carefully document the decision-making process throughout the transaction; and
- Retain sufficient records demonstrating compliance with their fiduciary obligations.
Even advisers with no current plans to pursue a continuation vehicle should expect SEC examination staff to continue asking questions about valuation governance, conflicts management and transaction documentation as these transactions become increasingly common across the private equity industry.
Trillium Perspective
Continuation vehicles are not new, nor are they inherently problematic. In many circumstances, they can provide meaningful benefits to both existing and new investors. What has changed is the SEC’s apparent willingness to closely scrutinize how these transactions are structured, documented and disclosed.
Private equity advisers should view this reported investigation as another reminder that sophisticated transactions require equally sophisticated compliance processes. Robust governance, thoughtful conflict management and comprehensive disclosure remain the strongest tools for demonstrating compliance with an adviser’s fiduciary obligations.
As continuation vehicles continue to grow in popularity, advisers should expect them to remain a significant area of SEC examination and enforcement focus.