Lawsuit highlights private equity's CV conflict
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A Middle Eastern sovereign wealth fund last month sued to stop a Houston-based private equity firm from selling a portfolio company to a continuation vehicle, with both sides yesterday agreeing to enter arbitration.
Why it matters: This dispute gets at the fundamental conflict between LPs and GPs when it comes to CVs, which may have just peaked, if you boil away all goodwill and assumption of positive intent.
On the docket: Abu Dhabi Investment Council is a limited partner in PE funds raised in 2011 and 2014 by Energy & Minerals Group. They both hold stakes in Ascent Resources, a large natural gas company that also counts First Reserve among its investors.
- ADIC claims that EMG decided that it could maximize its value for Ascent via a CV strategy.
- It then alleges that EMG tried to force an LP vote on very short notice, provided different data to different investors, and refused to let the LPs confer in private. ADIC also casts doubt on EMG obtaining the requisite votes it claims to have obtained.
- Neither side responded to Axios' request for comment.
The big picture: General partners often claim that they form CVs for their best portfolio companies, the ones they just can't yet bear to part with. Almost as a favor to LPs desperate for liquidity ("We're not selling, but if you need to...").
- LPs, however, are often skeptical but feel boxed in. If they don't participate, might they be blackballed in the next fundraise?
- There certainly are amicable CV situations in which everyone expects to benefit, but there's just as many that create LP unease.
Zoom in: ADIC's complaint, filed in Delaware Chancery Court and recently unsealed, lays out a different narrative. It alleges that EMG told existing LPs that Ascent was in bad shape, unable to go public or be sold, while telling prospective CV investors the opposite.
- Moreover, ADIC claims that the CV would have reset management fees and carry on Ascent in a way that would have benefited the general partner, which is generally frowned upon.
- It's also not too surprising, given that EMG hasn't raised a new fund since 2019 (i.e., the fee stream is running dry).
Look ahead: An arbiter is expected to render a final decision by Feb. 27, 2026, before which EMG has pledged not to complete the CV transaction.
