The Abu Dhabi Investment Council, the sovereign wealth fund of the namesake emirate within the United Arab Emirates, is suing one of its private equity managers due to the manager’s plans to sell a portfolio company into a continuation vehicle.
The complaint, filed in the Delaware Chancery Court this week, alleges that the Energy & Minerals Group planned to move its stake in Ascent Resources LLC, the largest private natural gas company in the U.S., into an EMG-sponsored continuation vehicle, while withholding key information from its limited partner investors.
The ADIC alleges that EMG had incentives to buy out its LPs’ interests for the lowest price possible to maximize its earnings and carried interest from the CV.
The complaint, which seeks a preliminary injunction, claims that EMG told its advisory board of limited partners that the valuation of Ascent Resources was depressed compared with peers and had no prospect of an exit through an initial public offering or a merger or acquisition. EMG allegedly told potential investors in the CV the opposite—that the value of the company was competitive with peers and that an IPO could be expected, with an upside case of a merger transaction.
According to reports, EMG halted the planned sale of its stake in Ascent Resources after the ADIC filed suit.
The slowdown in private equity exits has led to an increase in the number of transactions on the secondary market. General partner-led secondary transaction volume stood at $47 billion in the first half of the year, according to Jefferies—of which 87% consisted of continuation vehicles.
The ADIC complaint highlights the risks that exist for LPs in GP-led secondary transactions. When the GP is also a buyer of the assets being sold into its CV, they have an incentive to undervalue those assets to benefit the new vehicle. LPs then have the option to sell their investments at a discount or roll them over into the continuation vehicle with potentially less favorable terms.
The complaint states, “EMG is investing more of its own money into the continuation vehicle, making it a ‘net buyer,’ and because the sale price will re-set EMG’s ‘carried interest’ for purposes of the continuation vehicle (making it likely that EMG, for the benefit of itself, not its fund investors, will earn [an unspecified amount] upon exit from the Ascent investment, whereas EMG stands to earn no or minimal carried interest on the asset if an exit to a third party buyer were to happen now). Both of these facts incentivize EMG to buy out its current investors, including ADIC, at as low a price as possible.”
Tags: Abu Dhabi Investment Council, continuation funds, Litigation, Private Equity, sovereign wealth funds