The Continuation Fund Conflict Wave Is Just Getting Started

TL;DR: Only 3 of 43 LP Advisory Board members voted to approve a $1.5 billion continuation vehicle, and the deal closed anyway. That single data point from ADIC v. EMG, Delaware Court of Chancery, C.A. No. 2025-1389-NAC, tells you everything you need to know about the state of LP governance in GP-led secondaries right now. The conflict wave is not coming. It is already here, and limited partners who rely on Advisory Board consent as their primary protection are going to get hurt.

What a Continuation Fund Actually Is (And Why the Conflict Bakes In Automatically)

Let me give you the plain-English version, because the jargon in this space does a lot of work obscuring what is actually happening. A continuation fund (also called a continuation vehicle or CV) is a new fund that a private equity manager, the general partner or GP, creates to hold assets from an older fund whose time limit is approaching. The GP transfers one or more portfolio companies from the expiring fund into the new vehicle. Existing limited partners (LPs), meaning the pension funds, endowments, and family offices who put up the capital, get a choice: roll your interest into the new fund, or sell your stake and take cash. New investors, typically secondary market buyers, come in to provide the liquidity that makes the deal work.

That structure sounds reasonable in theory. In practice, it creates a textbook conflict of interest. The GP sits on both sides of the transaction simultaneously. As manager of the old fund, the GP has a fiduciary duty to get the best price for existing LPs who want to sell. As sponsor of the new fund, the GP benefits from a lower valuation, because a lower entry price means more upside for the next performance cycle. The GP also controls what information gets shared, controls the timeline, and controls the process by which limited partners are consulted.

That consultation process runs through the LP Advisory Committee, or LPAC. The LPAC is a smaller group of limited partners designated in the fund's limited partnership agreement to vote on conflicts of interest and material transactions. In GP-led secondaries, LPAC approval is the contractual mechanism supposed to protect rank-and-file LPs from self-dealing. My thesis is that this mechanism has failed in practice, repeatedly, with documented evidence, and that the legal and regulatory architecture supposedly backstopping it has simultaneously been dismantled.

ADIC v. EMG: The Numbers That Should End the Debate

The Abu Dhabi Investment Council is not a small, unsophisticated investor. It is a sovereign wealth fund. When ADIC filed a verified complaint in the Delaware Court of Chancery in December 2025 against Energy and Minerals Group, the facts it laid out were stark. EMG sought to move Ascent Resources, a natural gas producer, into a new continuation vehicle. The LP Advisory Board had 43 members. Three voted to approve. Three out of forty-three.

Under a rational reading of what LPAC consent is supposed to mean, that vote should have killed the transaction, or at minimum triggered a serious renegotiation of terms. Instead, according to ADIC's complaint, EMG approached limited partners individually, outside the formal LPAC process, to build support piece by piece. The $1.5 billion deal closed in March 2026, after an arbitrator ruled in EMG's favor. ADIC's subsequent filing in the Delaware Court of Chancery, C.A. No. 2025-1389-NAC, attempts to unwind what it characterizes as a process that made a mockery of the approval mechanism.

You can read ADIC's position as sour grapes from a losing party. But the procedural facts tell a specific story: 3 of 43 members, individual outreach that substituted for a formal vote, and a deal that closed anyway. The governance structure bent without breaking in ways the limited partnership agreement apparently permitted. That is not an aberration. That is a design flaw. The Quinn Emanuel client alert from August 2026 describes this as part of a first wave of continuation fund disputes reaching courts and arbitration panels.

The SEC Already Told Us This Would Happen: American Infrastructure Funds (2023)

The ADIC situation might feel novel. It is not. Three years ago, the SEC put a roadmap in front of the industry. On September 22, 2023, the SEC charged American Infrastructure Funds LLC with breaching its fiduciary duties under Advisers Act Sections 206(2) and 206(4) for transferring toll-bridge assets from an existing fund into a new continuation fund, the New American Bridges Fund LP (NABF), without obtaining proper investor consent.

The structure of the violation matters. AIM transferred assets at valuations it controlled, locked existing investors into the new vehicle for an additional 11 years, and collected ongoing management fees on assets that the original fund investors had expected to be returned to them. The SEC's administrative order, IA-6428, resulted in a $1.2 million civil penalty and $445,460 in disgorgement and prejudgment interest. AIM neither admitted nor denied the findings.

Here is my read on why the AIM case did not deter: the penalty was too small to matter at fund scale, and no individual faced personal liability. When the cost of getting caught is a rounding error relative to the management fees at stake, rational actors do the math.

Dailane v. H.I.G.: When the Asset Valuation Itself Is the Allegation

The Dailane case adds a different dimension. Dailane Investments Limited sued H.I.G. Capital LLC, alleging that H.I.G. flipped Maillis Group, a packaging company, from Bayside Capital Fund II into H.I.G. Middle Market LBO Fund III at a transaction price of 157.5 million euros. The allegation is that pension liabilities were overstated by approximately 9.5 million euros to artificially depress the asset's value, benefiting the acquiring fund at the expense of the selling fund's investors. The Southern District of Florida dismissed H.I.G. Capital LLC in October 2025, and H.I.G. appealed to the 11th Circuit under Appeal No. 25-14213 CC, docketed December 2025.

I want to be careful about what Dailane proves. A dismissal at the district court level does not resolve the underlying facts, and the appeal is pending. What the case does illustrate is the specific mechanism: valuations in inter-fund transfers can be manipulated, and it is nearly impossible for an LP to prove that manipulation after the fact when the GP controls the data. LPAC members review only what the GP chooses to share. That is not a consent process. It is a ratification process.

The Regulatory Backstop That No Longer Exists

For a brief period, it looked like the SEC was going to address this structurally. The Private Fund Adviser Rules, adopted in August 2023, included a provision requiring advisers conducting GP-led secondary transactions to obtain a fairness opinion from an independent provider and distribute it to fund investors. On June 5, 2024, the 5th Circuit vacated the entire rule set in National Association of Private Fund Managers v. SEC, No. 23-60471. The court held that the SEC exceeded its statutory authority under Advisers Act Sections 206(4) and 211(h). The fairness opinion requirement is gone. So are the enhanced disclosure requirements and the preferential treatment rules. All of it, vacated.

The timing is not subtle. GP-led secondary volume hit $106 billion in 2025, up 51% from $70 billion in 2024. Private equity firms are sitting on more than 30,000 unsold portfolio companies as of June 2026, per Bain and Co. Each is a potential continuation vehicle candidate. The regulatory rule designed to protect LP interests in exactly these transactions no longer exists, and the cases reaching court suggest the contractual protections are being worked around.

The SEC is not dormant. Reuters reported in June 2026 that enforcement staff are running active probes into continuation vehicles. SEC Enforcement Director David Woodcock stated at a May 2026 industry event that the agency is "attuned to potential risks relating to liquidity, fees, valuations, and conflicts of interest" across private markets. Active probes are not rules. There is a meaningful gap between SEC attention and LP protection.

The Counterargument I Take Seriously

I want to be direct about where this thesis could be wrong. Not every continuation fund is a scheme. Many GP-led secondaries involve GPs with legitimate reasons to extend the holding period on performing assets, and ILPA, the Institutional Limited Partners Association, has published detailed guidance on continuation fund best practices precisely because thoughtful governance is achievable. If you are a $50 billion sovereign wealth fund, you have use that a mid-sized endowment does not. At $106 billion in annual volume and growing, continuation vehicles are a mass-market product being run through a bespoke governance process that was built for a far smaller market. That mismatch is the problem, not individual GP intent.

Case Comparison: What the Record Actually Shows

Case	Core Allegation	Outcome / Status
ADIC v. EMG, Del. Ch. C.A. No. 2025-1389-NAC	3 of 43 LPAC members approved $1.5B continuation vehicle. GP ran individual outreach campaign to bypass formal vote. ADIC alleges process fraudulently circumvented the consent requirement.	Arbitrator ruled for EMG. Deal closed March 2026. ADIC pursuing Delaware Chancery action to unwind.
SEC v. American Infrastructure Funds LLC, IA-6428 (2023)	Transferred toll-bridge assets to NABF without investor consent. Locked LPs in for 11 additional years. Collected ongoing management fees. Advisers Act Sections 206(2) and 206(4).	$1.2M civil penalty plus $445,460 disgorgement. No admission of wrongdoing.
Dailane Investments Ltd. v. H.I.G. Capital, 11th Cir. No. 25-14213 CC	Inter-fund transfer of Maillis Group at 157.5M euros. Pension liabilities allegedly overstated by 9.5M euros to depress value in favor of acquiring fund.	District court dismissed H.I.G. Capital LLC (Oct. 2025). Appeal pending in 11th Circuit (docketed Dec. 2025).
Nat'l Ass'n of Private Fund Managers v. SEC, 5th Cir. No. 23-60471	Industry challenge to SEC's Private Fund Adviser Rules, including the adviser-led secondaries fairness opinion requirement.	5th Circuit vacated rules in full, June 5, 2024. Fairness opinion requirement eliminated.

What LPs Should Actually Do About This

Relying on the existing LPAC consent provision in a standard limited partnership agreement is not enough. The EMG situation exploited ambiguity in what counts as a valid meeting, what quorum looks like, and whether individual outreach counts as consent. Push for explicit requirements at fund formation: formal written notice to all LPAC members, minimum response periods, mandatory third-party valuation, and a clear supermajority threshold with no procedural workaround path. The SEC's rule requiring independent fairness opinions on GP-led secondaries is gone. Negotiate the same protection privately. And make sure you have real transferability rights that let you sell at market-tested prices, not at a GP-controlled tender.

These cases did not happen because GPs are uniquely bad actors. They happened because the contractual and regulatory framework permitted them to happen. Three court cases and a 5th Circuit vacatur later, the framework has not improved. It has gotten worse. The GP-led secondary market will keep growing because the economics for GPs are too attractive to stop. The conflict wave is not starting. It has started. What you do with your next LP agreement determines which side of it you are on.

Frequently Asked Questions

What is an LP Advisory Committee and why does it matter in continuation fund transactions?

An LP Advisory Committee (LPAC) is a subset of a private equity fund's limited partners, typically the largest investors, designated in the limited partnership agreement to review and approve conflicts of interest and material transactions. In a GP-led secondary, LPAC consent is supposed to protect rank-and-file LPs from the GP sitting on both sides of the deal. In practice, as ADIC v. EMG documents, the process can be circumvented through individual LP outreach, procedural ambiguity, or information asymmetry that leaves LPAC members unable to evaluate whether transaction terms are fair to the sellers.

Why did the 5th Circuit's ruling matter so much for LP protection?

The SEC's Private Fund Adviser Rules would have required advisers conducting GP-led secondaries to obtain an independent fairness opinion and share it with all fund investors, forcing information parity at the moment LPs are most disadvantaged. The 5th Circuit vacated the entire rule set in June 2024 in National Association of Private Fund Managers v. SEC, No. 23-60471, eliminating that protection precisely when the GP-led secondary market was accelerating past $100 billion annually. LPs are now left to negotiate those protections individually at fund formation, and most do not.

Does the AIM enforcement action mean GPs face serious risk for continuation fund conflicts?

The deterrent effect has been limited. AIM paid a $1.2 million civil penalty and $445,460 in disgorgement, meaningful for an individual but modest relative to management fees from an 11-year extension. No individuals faced personal liability. With the Private Fund Adviser Rules vacated, the SEC is operating under general anti-fraud authority under Advisers Act Sections 206(2) and 206(4), making enforcement outcomes fact-intensive and unpredictable. Scrutiny is increasing, but scrutiny is not the same as enforceable rules.

What should LPs actually negotiate at fund formation to protect themselves?

Four things matter most. First, explicit LPAC meeting and quorum requirements that prevent individual outreach from substituting for a formal vote. Second, a mandatory independent fairness opinion for any GP-led secondary above a defined NAV threshold. Third, real transferability rights giving LPs a genuine option to sell at market-tested prices rather than a GP-controlled tender. Fourth, enhanced information rights requiring the GP to share valuation models and conflict disclosures with all LPs before any consent clock begins. ILPA's published guidance covers all four. Most LP agreements are still written to the GP's preferred minimal standard because LPs do not push hard enough at the negotiation stage.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.