Private Litigation Underscores Risks in Continuation and Cross-Fund Transactions

Background

• On July 5, 2025, a civil complaint was filed in the United States District Court for the Southern District of Florida against a prominent private equity firm, arising from a cross-fund transaction that closely resembled a continuation vehicle structure⁽¹⁾.
• The plaintiff, a co-investor in the transaction, alleges that they were not provided with sufficiently accurate or complete information during the approval process .
• While the case remains in early stages and the allegations are unproven, the matter draws attention to key regulatory and fiduciary challenges associated with continuation funds and cross-fund transactions.

Overview of Allegations

• Plaintiff’s Role: The plaintiff had sold Company A to the private equity firm’s fund and rolled a portion of his proceeds into a new investment vehicle, becoming a co-investor.
• Alleged Sequence of Events:
  • The firm initiated an auction process for Company A but received limited interest and only one bona fide offer, which fell below internal valuation expectations.
  • Rather than proceeding with the external offer, the firm executed a cross-fund transaction—moving Company A from one of its funds to another—based, in part, on the pricing indicated during the auction.
  • The transaction was approved, including by the plaintiff.
  • The plaintiff later concluded that the pricing may have been misrepresented or inadequately justified and subsequently initiated legal proceedings.

Key Compliance Considerations

• Dual Fiduciary Duties: Advisers managing cross-fund transactions must uphold fiduciary obligations to both selling and buying vehicles. Advisers undertaking a continuation vehicle process have fiduciary duty to the selling fund, as the continuation vehicle is not a client at the time of the transaction. The core allegation in this case suggests a perceived imbalance—where the acquiring fund may have received favorable pricing to the detriment of the selling fund. This underscores the importance of establishing pricing methodologies that are equitable to all stakeholders involved.
• Fairness Opinions and Conflicts: The firm engaged a third-party to provide a fairness opinion; however, the complaint raises concerns about the valuation agent’s independence. It alleges that the agent had also overseen the unsuccessful auction for Company A and may have had an incentive to support a lower valuation to avoid drawing attention to the auction’s failure. The complaint further asserts that the private equity firm requested a downward revision to the valuation range, which the agent agreed to. While it is typical—and often appropriate—for advisers and valuation agents to discuss valuation assumptions, any revisions made without clear rationale or documentation may raise questions about the credibility and impartiality of the valuation process.
• Omissions: The plaintiff contends that when questions were raised about the transaction’s structure and valuation, the firm provided reassurances without fully disclosing material details. Though the case is not brought under the Investment Advisers Act, it highlights the importance of disclosing all relevant facts.
• Valuation Methodology: The complaint claims that certain model assumptions were selectively modified to arrive at a target valuation. While it’s not uncommon for advisers to have strong convictions about a portfolio company value, retrofitting assumptions to achieve desired outcomes poses legal and ethical risks, and may be construed as manipulative or misleading.
• Electronic Communication Etiquette: Internal communications discussing valuation inputs and rationale are a focal point of the case. These communications, while often routine and reflective of good-faith debate, can be interpreted unfavorably if they appear inconsistent or speculative. Firms should remain mindful that internal documentation can become central in legal scrutiny.
• Precedent: Should this case proceed successfully, it may establish a meaningful legal precedent in the context of private equity secondary transactions—particularly those involving continuation funds or cross-fund transfers. A favorable outcome for the plaintiff may increase litigation risk for private equity sponsors, reinforcing the need for robust governance, transparent processes, and well-documented decision-making. It could also serve as a roadmap for future private actions, particularly where investors believe that pricing mechanisms or fiduciary duties were compromised in the course of secondary transactions.
  

_{(1) DAILANE INVESTMENTS LIMITED v. HIG CAPITAL LLC and SAMI MNAYMNEH}