The US Securities and Exchange Commission's enforcement division is investigating continuation vehicles (CVs) - funds commonly used by private equity firms to hold onto assets they cannot or do not want to sell. According to reports from Reuters, SEC enforcement personnel have focused on many CVs in recent months, examining possible conflicts of interest related to these vehicles, how managers value the assets, and whether investor disclosures are adequate and consistent. The investigation represents a significant escalation from previous monitoring activities, with enforcement division employees establishing what they called an unofficial 'working group' with investment management and examination departments since late last year. The enforcement scrutiny into CVs has not previously been reported, with sources describing the coordination as an informal working group to ensure closer coordination and information-sharing on the opaque private credit market.
Continuation vehicles have become increasingly popular, with fund manager-led secondary transactions totalling $106 billion last year according to Evercore, up from $70 billion in 2024. The vehicles enable managers to acquire new investors and extend holding duration while allowing current investors to cash out, providing a mechanism for managers to return investor money without selling assets to rivals or at steep discounts in challenging markets. While CVs mostly deal in equity assets, the proportion of credit assets is growing, with credit making up 11% of secondary transactions last year, up from 5% in 2024. The global private credit market is generally agreed to be worth at least $1.8 trillion, with many private equity firms currently sitting on a backlog of more than 30,000 unsold portfolio companies according to June data from consultancy Bain & Co.
According to the report, finding purchasers prepared to match the high multiples paid for some companies has become more difficult for PE firms due to rising interest rates, particularly during the pandemic when rates were low and money was cheap. Sales from private equity portfolios have been further stretched by geopolitical unrest, regulatory uncertainty, and artificial intelligence-driven disruption. Conventional private equity funds typically have a 10-year lifespan, and CVs enable managers to transfer assets from older funds into new vehicles while maintaining control over asset disposal timing. The Abu Dhabi Investment Council (ADIC) last year filed a legal complaint against a CV launch by Energy & Minerals Group (EMG), accusing the private equity firm of trying to force a conflicted sale, though a Delaware court dismissed the case and the CV deal closed in March.
As reported by Reuters, SEC Chairman Paul Atkins stated at an event last month that the agency is investigating allegations of fraud in private credit firms, while enforcement director David Woodcock added that the agency is 'attuned to potential risks relating to liquidity, fees, valuations, and conflicts of interest' across the industry. The escalation to enforcement division involvement and cross-division cooperation demonstrates growing concerns among regulators regarding potential weaknesses in private markets. Managers claim they typically obtain third-party opinions for CV deals, and SEC investigations do not necessarily lead to fines or other consequences. The increased oversight follows problems at alternative asset manager Blue Owl and BlackRock funds late last year, which sparked fears that cracks are emerging in private credit markets.
