The U.S. Securities and Exchange Commission’s enforcement division has commenced a probe into “continuation vehicles,” or CVs, typically utilised by private equity firms and other money managers. This previously unreported scrutiny is part of the agency’s broader examination of potential issues within private markets. SEC enforcement staff are specifically investigating potential conflicts of interest around these vehicles, the methods managers employ to value assets, and whether investor disclosures are both sufficient and consistent. This intensified focus comes as CVs have seen a significant surge in popularity, with fund manager-led secondary transactions reaching US$106 billion last year, according to Evercore.
Continuation vehicles allow managers to find new investors and transfer assets from older funds into a new vehicle, thereby extending the holding period while offering existing investors the option to cash out. These vehicles provide managers a way to return cash to investors without being forced to sell assets at a deep discount in weak markets or realise potential losses. Their increased adoption is driven by challenging market conditions, including rising interest rates making it harder for private equity firms to find buyers willing to match previous lofty valuations. Geopolitical turmoil and policy uncertainty have further strained sales from private equity portfolios, leading to a substantial backlog of unsold companies.
Beyond the enforcement probe, SEC staff have also established an informal “working group” across various divisions to enhance coordination and information-sharing on the opaque private credit market. While SEC examiners have scrutinised private funds for some time, this escalation to the enforcement division underscores growing regulatory concerns. Increased oversight of private markets follows their rapid expansion over the past decade, with US scrutiny particularly heightened after late-last-year issues at alternative asset managers Blue Owl and BlackRock funds sparked fears of emerging cracks. It is important to note that SEC scrutiny does not automatically imply wrongdoing, nor does it always result in penalties or other regulatory action.
