Major institutional investors are sounding the alarm over continuation funds and related-party transactions. They are right to do so — and the industry’s window to self-correct is narrowing fast.

The most elegant swindle in finance is the one where the victim cannot quite prove they were robbed. Private equity has, over the past decade, constructed a variant of precisely this: a transaction structure in which the same firm simultaneously acts as seller, buyer, valuation agent, and vote-counter — all in a single, legally defensible package. It is called a continuation vehicle. And its explosive rise, from a niche exit technique to the dominant method of recycling assets in a frozen deal market, has finally brought the industry’s long-simmering conflict-of-interest problem to a boil.

On April 27, 2026, the Financial Times reported that major private equity backers — pension funds, sovereign wealth managers, endowments — are raising fresh, organised concerns over what they increasingly call “sweetheart deals”: transactions in which buyout firms appear to engineer outcomes that serve the general partner’s economic interests at the expense of the limited partners who actually supplied the capital. The concerns are not new. What is new is the volume, the specificity, and the seniority of the voices now making them.

This matters enormously. Private equity manages north of $7 trillion in assets globally, a sum that encompasses not just the portfolios of family offices and hedge funds but the retirement savings of nurses, teachers, and municipal workers whose pension funds have spent two decades increasing their allocations to the asset class. When the governance framework underpinning those allocations begins to crack, the consequences radiate far beyond the quarterly LP meeting.

The Continuation Fund Explosion — and Its Discontents

To understand the complaint, one must first understand the structure. A continuation vehicle — sometimes called a GP-led secondary — is, in essence, a mechanism by which a private equity firm transfers an asset from one of its funds into a newly created fund that it also manages. Existing limited partners are given a choice: cash out at the offered price, or roll their interest into the new vehicle. New investors — typically secondary market funds — provide fresh capital. The general partner earns new management fees and, critically, resets the carried-interest clock.

The structure was once deployed sparingly and, in many instances, genuinely beneficial: a prized asset requiring more time and capital to reach its potential, a strategic rationale for a longer hold that reasonable investors could assess. Those use cases still exist. But the market has mutated far beyond them.

Just 5% of private equity exits were continuation funds in 2021. By 2024 that figure had risen to 13%, and by 2025 it had reached approximately 20% — meaning one in five asset sales now involves a firm effectively selling to itself. The total dollar value of continuation funds was expected to hit $100 billion by the end of 2025, compared to $35 billion in 2019, according to Evercore data cited by the New York Times. By Q3 2025, US and European private equity firms had completed 105 continuation fund deals, a sizeable increase on the 87 sealed in the first three quarters of 2024.

The structural driver is not hard to find. With over $3 trillion of unrealised value sitting in global buyout portfolios, the three-to-five-year average holding period is firmly in the past; five to six years is the new baseline. IPO markets remain effectively closed to many sponsor-backed businesses. Trade sale multiples have compressed under the weight of higher interest rates and buyer caution. And global PE fundraising dropped 3.8% from $724 billion in 2024 to just under $700 billion in 2025 — the lowest level in more than five years. GPs desperate to show distributions, keep the fee stream alive, and retain the optionality to raise their next fund have discovered that continuation vehicles solve all three problems simultaneously.

This is the nub of the abuse: the incentives are completely misaligned. These transactions inherently involve conflicts of interest, as the sponsor effectively acts as both seller and buyer, and they present heightened sensitivity around valuation. The GP has every incentive to price the asset low enough to attract secondary buyers (who expect a discount to fair value) and to structure the carry reset in its own favour — all while presenting existing LPs with an artificial choice between accepting the offered price or remaining exposed to an illiquid position under the same manager who just demonstrated questionable judgment in setting the price.

Abu Dhabi’s Lawsuit and What It Reveals

The clearest window into the anatomy of a disputed continuation fund comes from a Delaware courtroom. On November 26, 2025, Abu Dhabi Investment Council (ADIC), part of the approximately $300 billion Mubadala investment group, filed a lawsuit in the Chancery Court of Delaware against Energy & Minerals Group LP and several affiliated private investment funds. The complaint alleged that EMG was engineering a conflicted, below-market sale of its stake in Ascent Resources — the largest private natural gas company in the United States — into an EMG-sponsored continuation vehicle. Energy & Minerals Group had already lined up investors for a continuation fund of at least $800 million when ADIC sued and halted the process.

The specific allegations are instructive. ADIC claims that EMG told existing LPs that Ascent was in bad shape, unable to go public or be sold, while telling prospective CV investors the opposite. Moreover, ADIC claims that the continuation vehicle would have reset management fees and carry on Ascent in a way that would have benefited the general partner. The complaint also alleged that EMG tried to force an LP vote on very short notice, provided different information to different investor groups, and declined to allow LPs to confer privately before the vote. According to ADIC, the transaction would harm limited partners, confer substantial benefits on EMG insiders, and allow the manager to reset performance-fee economics on an asset that would be unlikely to generate carried interest if sold in a conventional exit or public offering.

The case has since drawn in additional parties. Hedge fund Mason Capital Management accused law firm Kirkland & Ellis of providing conflicted legal advice, arguing that Kirkland was conflicted because it advises the company’s directors while also representing EMG, Ascent’s private equity sponsor. Kirkland & Ellis is, notably, the most prominent legal adviser to the private equity industry globally — a fact that underscores how deeply the conflicts can proliferate through a single transaction’s stakeholder map.

ADIC v. EMG is not an isolated incident. Similar litigation was filed in the Southern District of Florida, where plaintiffs alleged a claim for aiding and abetting a breach of fiduciary duty against private equity firm HIG Capital in connection with a continuation vehicle transaction. The pattern emerging across these cases is not one of rogue actors but of structural incentives that almost inevitably produce conflicted behaviour when left unchecked.

The Regulatory Vacuum — and Who Filled It With Nothing

For a brief moment in 2023, it appeared that American regulators might impose meaningful guardrails. The Securities and Exchange Commission, under Gary Gensler, adopted a sweeping set of Private Fund Adviser Rules that would have required, among other things, enhanced disclosure to investors, fairness opinions for adviser-led secondary transactions, and quarterly statements with transparent fee reporting. The industry pushed back with considerable force.

In a unanimous decision published on June 5, 2024, the US Court of Appeals for the Fifth Circuit vacated the entire set of regulations, ruling that the SEC had exceeded its statutory authority. The Court found that the SEC cannot issue rules that affect the “internal governance structure” of private funds, reasoning that by congressional design, private funds are exempt from regulation over their internal governance. For the private equity industry, it was an extraordinary legal victory. For institutional investors quietly watching the ADIC case unfold from Abu Dhabi to Houston to Wilmington, it was a warning shot in the opposite direction.

The regulatory vacuum that now exists is not benign. It does not mean that GPs can behave however they wish without consequence — common law fiduciary duties still apply, as the Delaware courts regularly remind the industry. But it does mean that the primary enforcement mechanism for LP protection is expensive litigation after the fact, which remains accessible mainly to large sovereign wealth funds, not to the pension plan of a mid-sized American municipality.

What fills the gap? Largely: LP advisory committees (LPACs), whose power varies enormously depending on negotiating leverage at the point of fund subscription; independent fairness opinions, which the GP selects and pays for; and the reputational discipline of the fundraising cycle, which applies only so long as the GP needs to raise another fund. Nearly half of asset managers are already using continuation funds to unlock liquidity, a scale at which informal norms are plainly insufficient.

The Broader Erosion of Trust

The sweetheart deal problem sits within a larger story of governance drift. Private equity’s extraordinary run of returns between 2009 and 2021 was achieved partly through genuine operational value creation and partly through the secular tailwind of falling interest rates inflating all asset values — a tailwind now demonstrably exhausted. The industry’s standard defence — that LPs are sophisticated parties who negotiated their terms and can walk away — was always more reassuring in theory than in practice.

Complexity as camouflage. Fee structures in private equity have proliferated to a degree that makes honest comparison nearly impossible. Management fees, monitoring fees, transaction fees, portfolio company consulting fees, and now NAV facility costs have been layered together in documents that run to hundreds of pages. The Fifth Circuit’s ruling that disclosure failures cannot constitute fraud when no duty to disclose exists is, in this context, a remarkable legal proposition: it essentially enshrines opacity as a protected feature of the asset class.

The retail investor time bomb. With sovereign wealth funds and family offices equipped with patient, low-leverage capital continuing to expand their presence, some of the more disciplined institutional money is growing selectively cautious. Into that gap is flowing retail capital — through the rapid expansion of evergreen funds, business development companies (BDCs), and interval funds now being marketed to wealthy individuals and, increasingly, defined-contribution pension plans. These vehicles expose retail investors to the full complexity of continuation fund conflicts without any of the negotiating leverage that a $300 billion sovereign wealth fund possesses.

The dry powder paradox. Dry powder reached a record high of $1.1 trillion, yet fundraising is falling. The apparent contradiction resolves this way: capital is concentrating at the top of the market, as LPs double down on the largest, most established managers while growing wary of the mid-market. The top ten [private equity funds] took their largest share of US fundraising in more than a decade. This concentration is itself a governance risk: it reduces competitive pressure on the largest GPs to reform their practices, since their fundraising success no longer depends on the goodwill of any individual LP.

The Industry’s Legitimate Defence — and Its Limits

To be fair about this — and the analysis demands fairness — continuation vehicles, done properly, are genuinely useful instruments. They allow high-quality businesses to reach their full potential rather than being rushed to a trade sale at an inopportune moment. Secondary market buyers provide genuine price discovery. Independent LPAC oversight, where robust, can catch and correct the most egregious valuation games. Blackstone, KKR, Apollo, and other large-cap managers have invested substantially in governance infrastructure precisely because their reputations are worth protecting.

The defence the industry most commonly deploys — that LP consent provides adequate protection — is true in its strongest cases and meaningless in its weakest. When an LP advisory committee is stacked with passive investors, when the “consent” vote is conducted on short notice without full information parity, and when the only alternative for a dissenting LP is illiquidity, “consent” is a procedural fiction. The EMG case is instructive precisely because it shows a sophisticated sovereign wealth fund with the resources to litigate feeling that the process was fundamentally rigged against it.

Reforms That Could Actually Work

The industry faces a choice that is more pressing than it currently appreciates. The combination of litigation accumulation, LP sentiment hardening, and the likely return of a more interventionist regulatory environment creates a narrow window for credible self-reform. The following measures would represent genuine progress:

1. Mandatory independent valuation. Continuation fund transactions should require a fairness opinion from an adviser selected by the LPAC — not the GP — and paid for by the GP. This mirrors standard practice in public company mergers.
2. Information parity requirements. All material information provided to prospective CV investors must simultaneously be provided to existing LPs. The asymmetric disclosure alleged in the EMG case — telling old investors the asset is stranded while telling new investors it is a hidden gem — should be explicitly prohibited in partnership agreements.
3. Enhanced LPAC composition standards. Institutional investors should negotiate, at the fund-subscription stage, for LP advisory committees that include representatives with genuine independence from the GP’s existing commercial relationships.
4. Carry reset restrictions. The practice of resetting carried interest on the same asset when it moves into a continuation vehicle should be subject to a clear disclosure requirement and, ideally, a high-consent threshold from existing LPs.
5. Standardised disclosure frameworks. Industry bodies including the Institutional Limited Partners Association (ILPA) have published guidance on GP-led secondaries that is increasingly widely adopted. Making ILPA best practices a baseline expectation — rather than an aspirational aspiration — would significantly raise the floor.

The macroeconomic environment makes reform urgent. With so much stuck capital and secondary markets on a roll, longer holding periods will drive more LPs and GPs to sell portfolios and release capital. Continuation vehicles will not disappear — nor should they. But their legitimacy depends on a governance framework that does not currently exist at the necessary scale.

The Long Shadow of Scandalous Precedent

Those with long institutional memories will recall that the savings-and-loan crisis, the collapse of Long-Term Capital Management, and the structured credit debacle that became the 2008 financial crisis all shared a common early chapter: sophisticated actors convincing themselves that conflicts of interest were “managed” until they manifestly were not, while regulators and investors were reassured by the complexity of the instruments involved.

Private equity is not facing a systemic risk of that order — the leverage is more contained, the assets more heterogeneous. But the governance rot, left untended, has a well-established tendency to compound. The institutional investors raising alarms in April 2026 are doing so from a position of comparative strength. They still have capital to deploy; they still have leverage in the fundraising conversation; they still have the reputational threat that matters to GPs with funds to raise.

That leverage diminishes the longer the conversation remains abstract. What is needed now is not another ILPA consultation paper or another conference panel on “alignment of interests.” What is needed is a clear, industry-wide recognition that selling assets to yourself, at a price you set, under terms you wrote, is not merely a governance gray area — it is a fundamental challenge to the proposition that private equity serves anyone other than its own general partners.

The investors are right to sound the alarm. The question is whether the industry will hear it before the courts, the regulators, or the capital flows make the answer irrelevant.