As the agency investigates possible problems in private markets, the US Securities and Exchange Commission's enforcement division is looking into funds commonly used by private equity firms and other money managers to hold onto assets they either cannot or do not want to sell, according to reports.
The SEC enforcement personnel have focused on many "continuation vehicles" or CVs in recent months, as per a report by Reuters, which cited sources.
According to the three sources, they are looking into possible conflicts of interest related to the CVs, how managers value the assets, and whether investor disclosures are adequate and consistent. Reuters was unable to identify the precise funds under investigation or the kinds of assets they possess.
There hasn't been any prior reporting on the enforcement review of resumes.
According to Evercore, continuation vehicles have become increasingly popular, with fund manager-led secondary trades totalling $106 billion last year.
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. By transferring assets from older funds into a new vehicle, CVs enable managers to acquire new investors and extend the holding duration while allowing current investors to cash out.
Because of this, the vehicles allow managers to give investors their money back without having to sell assets to a rival company or at a steep discount in bad markets, which could result in losses. Although the proportion of credit assets is increasing, CVs mostly deal in equity assets.
Since late last year, employees in the enforcement division have also worked to establish what they called an unofficial "working group" with the investment management, examination, and other departments to guarantee better coordination and information exchange on the opaque private credit market.
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Even though SEC examiners have been closely monitoring private fund issues, especially continuation vehicles, for some time, the escalation to the enforcement division and the cross-division cooperation show growing worries among watchdogs regarding potential weaknesses in private markets.
Managers claim that for CV deals, they usually get third-party opinions. SEC investigation does not necessarily lead to fines or other consequences and is not proof of misconduct.
Without providing further details, SEC Chairman Paul Atkins stated at an event last month that the agency is looking into claims of fraud in private credit agencies. At an event last month, David Woodcock, the agency's enforcement director, added that the agency is "attuned to potential risks relating to liquidity, fees, valuations, and conflicts of interest" across the industry.
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