Abu Dhabi fund sues to block a controversial continuation fund deal
The deal roiling the world of continuation funds
Continuation funds, the complex vehicles private equity firms use to sell assets between their funds, have for years been a special interest for DD.
We have outlined the fraught nature of these deals in which a PE firm is both the seller of an asset and its buyer, an inherent conflict.
Kaye Wiggins, DD’s legal expert, offered epic but prescient deep dives into continuation funds years ago during the exuberant capital markets environment of the early 2020s.
In 2022, DD outlined all of the ways the deals could prove to be problematic, including the incentives for PE firms to use the vehicles to reset lucrative management and performance fees on ageing deals.
At the time, we thought markets were booming. Little did we know the party was just getting started. Continuation funds now account for a staggering 19 per cent of PE exits.
But while we have heard in hushed voices critiques of alleged conflicts and stress in the investment community, few fights have become public.
On Wednesday evening DD’s Antoine Gara scooped what is the most prominent fight in the continuation fund world after Abu Dhabi Investment Council sued to block a large deal from moving forward.
The sovereign fund sought to block Energy & Minerals Group from selling its stake in Ascent Resources, one of America’s largest private gas drillers, to one of the private equity firm’s sister funds.
It alleged the deal undervalued Ascent while generating a windfall for the new fund managed by EMG. It further said the PE firm ran a flawed process.
The sovereign wealth fund’s complaint makes for good reading on all of the alleged ways in which the continuation vehicle deal favoured the PE firm orchestrating the transaction. (Lex offered a take on the drama as well.)
The lawsuit, filed in Delaware, has many rounds to go and will be a good barometer on whether more standard rules for CV deals are needed.
On Thursday, the PE firm agreed to halt the deal subject to arbitration, instead of closing as it had planned to do by year-end.