The private equity landscape is shifting. As exit opportunities in the public markets fluctuate, fund managers are increasingly turning to internal solutions to manage their portfolios. One specific practice has caught the attention of regulators and investors alike: intra-group asset transfers.

Often referred to as GP-led secondaries or continuation vehicles, these transactions involve moving assets from one fund to another managed by the same firm. While this can offer liquidity, it also raises significant questions about transparency.

For UK private equity funds, the potential for these transactions to misrepresent performance, obscure losses, and create unmanaged conflicts of interest is a growing concern. If these transfers happen without genuine price discovery or informed consent, they risk undermining market integrity. This article explores the mechanics of these transfers and why they are becoming a focal point for private equity regulatory issues.

Understanding the Practice: How It Works

To understand the risk, we must first look at the mechanism. In a standard scenario, a private equity manager (the General Partner, or GP) manages a fund nearing the end of its life cycle. Instead of selling an asset to a third party, the GP arranges for that asset to be transferred to a newly established fund—a continuation vehicle—also managed by them.

On paper, this might look like an exit or a realisation of the asset. However, the economic reality is different. Control of the asset remains within the same management group. Unlike a sale to an independent buyer, there is no arm’s-length negotiation. This lack of external validation is where the potential for private equity disputes begins.

Key Regulatory Concerns

The Financial Conduct Authority (FCA) relies on principles of fairness and integrity. When a manager sits on both sides of a transaction, these principles are put to the test. Below are the primary areas where private equity-backed transactions of this nature can run afoul of regulatory expectations.

Conflicts of Interest

The most immediate issue is the inherent conflict of interest. In a transfer between two funds managed by the same GP, the manager has competing duties:

• To the selling fund: The GP has a fiduciary duty to get the highest possible price for the asset to maximize returns for existing investors.
• To the acquiring fund: Simultaneously, the GP owes a duty to the new investors to acquire the asset at the best possible price (i.e., the lowest price).

These two objectives are mutually exclusive. Without robust safeguards, it is impossible to satisfy both duties. If a GP effectively controls the terms of the deal, there is a material risk that these conflicts are not managed or mitigated, which would be contrary to the FCA’s Principle 8 regarding conflicts of interest.

Valuation and Price Discovery

In a normal market sale, the price is set by what a buyer is willing to pay. In an intra-group transfer, that tension is often absent.

Concerns arise when the valuation is determined or heavily influenced by the GP itself. If competitive bidding is limited or independent fairness opinions lack transparency, the transfer price may not reflect the true market value.

This creates a dangerous possibility: losses could be deferred rather than recognized. By moving an underperforming asset into a new vehicle at an artificially high price, a manager might delay the “bad news” of a write-down, keeping the asset’s value artificially supported.

Misleading Performance Reporting

The way these transfers are reported can skew the perceived success of a fund. If an intra-group transfer is treated as a full “realisation” or an exit, it affects key metrics such as the Internal Rate of Return (IRR) and Distributed to Paid-In Capital (DPI).

If these metrics are materially overstated due to an artificial exit price, investors are being misled about the fund’s true economic performance. This touches on several regulatory nerves, specifically:

• Principle 7: Communications with clients.
• Principle 6: Customers’ interests.
• COBS 4: The requirement that communications must be fair, clear, and not misleading.

When UK private equity funds present inflated track records based on these internal movements, they risk attracting capital under false pretenses.

Investor Consent and Disclosure

Investors in the original fund are often given a choice: roll their interest into the new continuation vehicle or cash out. However, this choice is not always straightforward.

If the “cash out” price is determined through a non-competitive process, investors may feel forced to stay invested to avoid taking a loss. Furthermore, the disclosure documents provided to investors can sometimes be overly technical or incomplete.

If the documentation fails to clearly explain the conflicts, the GP’s financial incentives, or the lack of a true market test, the investor’s consent is not fully informed. This undermines the protections that the regulatory framework is designed to provide.

Fee and Incentive Structures

Finally, there is the issue of remuneration. Continuation vehicles can reset the clock on fees. A transfer may allow a GP to:

• Extend management fees on the same underlying asset.
• Crystallize “carried interest” (performance fees) based on an internal price rather than a realized market gain.
• Earn multiple layers of fees from a single investment.

This structure can incentivize managers to hold onto underperforming assets rather than dispose of them or write them down appropriately.

Market Impact and Consumer Harm

The ripple effects of these practices extend beyond individual funds. If widespread, they could distort reported performance across the entire private equity market.

When performance metrics are unreliable, it disadvantages existing investors in selling funds and misleads prospective investors during fundraising. Ultimately, this erodes confidence in the integrity of valuations and fund governance. While GP-led secondaries are a legitimate tool when used correctly, their growing use for weaker assets heightens the risk of systemic issues.

Regulatory Considerations

Given the risks outlined above, firms must be vigilant. What are common FCA regulatory investigation triggers in private equity firms? Often, they stem from the exact issues highlighted here: unmanaged conflicts, lack of transparency in valuations, and misleading communications.

The FCA is likely to consider whether these practices breach the obligation to manage conflicts fairly. They will scrutinize whether communications to investors are clear and if the firm is acting in line with statutory objectives regarding consumer protection and market integrity.

Firms facing scrutiny regarding these complex transactions often require specialist legal support. For those navigating FCA investigations, having experienced counsel is essential to manage the interaction with the regulator and protect the firm’s position. You can find more information on these services from a dedicated FCA Defence Lawyer in London.

This article does not suggest that all continuation vehicles are improper. They can provide valid liquidity solutions and extended runways for value creation. However, the risks are real.

Where assets are transferred within a manager’s own structure without genuine market testing, independent valuation, and fully informed investor consent, the line between strategy and manipulation blurs. This creates a significant risk of regulatory non-compliance.

Philip Rubens has extensive experience dealing with complex financial regulations and enforcement actions. To learn more about Philip Rubens and further legal services, get in touch here.