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A recurring theme in 2025 in the world of private equity is “keeping the wolf from the door”. For companies on the brink of running out of money, that manifests through the increasing popularity of so-called “liability management” exercises, where zombie companies are temporarily kept upright by tapping bountiful debt markets and strong-arming investors.
For companies in private equity portfolios that are not quite hobbled but not exactly thriving either, there are continuation vehicles. These are new funds created by the same private equity sponsor that can purchase a business when the original fund is at its contractual end. A way, in effect, of keeping a promising company in the fold.
A general rule in finance is that where there’s innovation there’s litigation. Liability management has produced a glut of US court cases; now continuation vehicles look likely to follow. A Middle Eastern wealth fund, the Abu Dhabi Investment Council, has sued a private equity firm, Energy & Minerals Group, which wants to shift a natural gas driller it owns from one pocket to another.
The problem, ADIC says, is that the deal is great for the private equity firm, but not for the investors in the original fund. It contends the company in question, Ascent Resources, could be worth more than $7bn in a regular sale or an initial public offering, yet in fact the stake being transferred by EMG suggests a valuation of just $5.5bn.
Such blow-ups are inevitable when a buyout firm is on both sides of the deal, as is the case where continuation vehicles are involved. There are certain safeguards, to be sure: transparency, independent advisers, “fairness opinions” and fiduciary duty. Some claims of wrongdoing might be meritorious and others not. Where the original investors don’t get a windfall, disappointment will often ensue.
ADIC describes being forced into a “Hobson’s choice”. It could put in new cash, or roll over its investment on terms it described as “materially worse than the status quo”. It also said in its lawsuit that EMG had not tried hard enough for third party, arms-length deals — though the Financial Times has reported other buyers passed on Ascent, believing the price too rich.
Private equity groups need to worry not just about selling assets to continuation funds, but the deals that come after. Where a continuation vehicle later makes a big profit by exiting its investment, it will spur claims — sincere or otherwise — that the limited partners in the first fund were taken for a ride. Some sponsors, including Clayton Dubilier & Rice, have netted sizeable profits through a second deal.
There are also examples that work the other way around. Clearlake Capital’s Wheels Pro went bankrupt in a successor fund. More recently, portable toilet company ISS, in a continuation vehicle backed by Fortress, Blackstone and Ares, is expected to be a wipeout, Bloomberg has reported.
Continuation vehicles, like liability management exercises, address real problems over timing and liquidity. Secondary funds, which buy whole slices of private equity portfolios, are another example.
But while the Masters of the Universe are good at navigating deadlines and cash crunches, they’re not always as deft at placating investors who feel they’ve got the rough end of the stick. For those people, litigation may continue to feel like the best medicine.
sujeet.indap@ft.com