SEC Expands Private Credit Scrutiny with New Probes into Popular Private Equity Funds
The U.S. Securities and Exchange Commission’s enforcement division is probing funds typically used by private equity firms and other money managers to hold on to assets they either cannot or do not wish to sell, as the agency explores potential issues in private markets, said three people familiar with the matter.
In recent months, SEC enforcement staff have homed in on a number of “continuation vehicles,” or CVs, said the people, who spoke on condition of anonymity.
They are investigating potential conflicts of interest around the CVs, how managers are valuing the assets, and whether investor disclosures are sufficient and consistent, the three people said. Reuters could not ascertain which specific funds are being investigated or what type of assets they hold.
The enforcement scrutiny into CVs has not previously been reported.
Continuation vehicles have surged in popularity, with fund manager-led secondary transactions worth $106 billion last year, according to Evercore.
Rising interest rates have made it harder for PE firms to find buyers willing to match the lofty multiples paid for some companies, especially during the pandemic when rates were low and money was cheap.
Geopolitical turmoil, policy uncertainty and disruption driven by artificial intelligence have strained sales from private equity portfolios even further.
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.
CLOSE COORDINATION AT THE SEC
Since late last year, staff in the enforcement division have also sought to build what the sources described as an informal “working group” with the examinations, investment management and other divisions, to ensure closer coordination and information-sharing on the opaque private credit market, the people said.
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.
The sources declined to be identified to discuss private enforcement matters.
Managers say they typically obtain third-party opinions for CV deals. SEC scrutiny is not evidence of wrongdoing and does not always result in penalties or other action.
At an event last month, SEC Chairman Paul Atkins said the agency is investigating allegations of fraud in private credit firms, without elaborating. The agency’s enforcement director, David Woodcock, also said at an event last month that the agency is “attuned to potential risks relating to liquidity, fees, valuations, and conflicts of interest” throughout the sector.
MARKET OVERSIGHT INTENSIFIES
Watchdogs have increased oversight of private markets as they ballooned over the past decade, but U.S. scrutiny has grown after problems at alternative asset manager Blue Owl (OWL.N) and BlackRock BLK.N funds late last year sparked fears that cracks are emerging in private credit, one of the people said. Blue Owl declined to comment.
BlackRock did not immediately respond to a request for comment.
Private credit broadly describes a range of nonbank business lending, although a large chunk of the market comprises direct loans to private equity portfolio companies. Estimates of the size of the global private credit market vary but it is generally agreed to be worth at least $1.8 trillion.
Private markets boomed thanks to a decade of near-zero interest rates, which made financing deals cheap. Many private equity firms are now struggling to profitably offload companies.
PE firms are currently sitting on a backlog of more than 30,000 unsold portfolio companies, according to June data from consultancy Bain & Co. Rolling them into CVs allows private equity firms to bring in new investors and give back some money to their original backers.
So-called secondary transactions launched by fund managers, of which CVs make up the majority, were worth $106 billion last year, up from $70 billion in 2024, according to investment bank Evercore. Credit made up 11% of those last year, up from 5% in 2024, said Evercore.
Critics have flagged the potential for conflicts of interest because the investment manager is on both sides of the transaction in what is usually an illiquid asset, creating incentives to skew valuations and raising questions about whether managers are telling buyers and sellers the same thing.
Some disputes have surfaced in public. 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. A Delaware court dismissed the case, and the CV deal closed in March.
A representative for EMG said the transaction had been analyzed with advisory firms, and that the claims were “baseless and without legal merit.” ADIC declined to comment.
Reporting by Chris Prentice, Dawn Kopecki and Isla Binnie in New York. Editing by Michelle Price and Matthew Lewis
This article was first reported by Reuters
