DealLawyers.com Blog

Last week, Reuters reported that the SEC’s Division of Enforcement is investigating potential conflicts of interest for private equity firms and other money managers related to continuation vehicles as well as “how managers are valuing the assets, and whether investor disclosures are sufficient and consistent.” CVs have been particularly popular recently, with PE firms having a hard time finding buyers willing to pay purchase prices that match their expected valuations.

Traditional private equity funds have a finite life cycle, usually about a decade. CVs allow managers to find new investors and transfer assets from older funds into a new vehicle, extending the holding ​period while giving existing investors the option to cash out.

As a result, the vehicles give managers a way to return cash to investors without being forced to sell assets at a deep discount in weak markets ​or to a competitor — or realize potential losses. CVs predominantly deal in equity assets, although the share of credit assets is growing.

While SEC examiners have been scrutinizing private fund issues, including continuation vehicles, ​for some time, the escalation to the enforcement division and the cross-division collaboration underscore growing concerns among watchdogs over potential problems in private markets.

Gibson Dunn & Crutcher partner Kate Timmerman said, “The structure of CV deals is unlikely to change. Sponsors are considering how to best manage the core conflict of a continuation vehicle in light of the ongoing SEC attention.”

“Now more than ever, sponsors need to demonstrate defensibility and be able to demonstrate a fair, well-documented, arm’s-length-like CV process,” she said.