As market conditions have made portfolio company exits more challenging, PE sponsors have increasingly turned to GP‑led secondary transactions to provide liquidity to existing investors. Although the industry has developed market-accepted practices for managing the inherent conflicts of interest in those transactions, litigation on the topic proves that sponsors and their counsel must remain vigilant to fulfill their respective fiduciary duties.

To address the array of ethical issues that can arise in GP‑led secondary transactions, Sidley Austin hosted a panel on the topic at its Private Funds & Asset Management: Developments & Opportunities conference featuring partners Oren Gertner, Nicholas C. Cassin and Lisa H. Miller; as well as John Leone, managing partner at Fairview Capital Group. This article examines the growing market for GP‑led secondaries; private litigation challenging such transactions; the conflicts of interest around pricing, carried interest, expense allocations and relationships; ethical issues for attorneys; and ways to mitigate and manage the inherent conflicts.

See our two-part series on LP roll-sell elections in continuation vehicles: “Practical Tips and Pitfalls for LPs in Continuation Vehicles” (Jun. 26, 2025); and “LP Diligence Guidance and Election Options” (Jul. 10, 2025).

Robust Market for GP‑Led Secondaries

There was a significant volume of secondary transactions in 2025, according to Gertner. Deal volume exceeded $225 billion, including more than $100 billion in GP‑led secondaries. “It is a very dynamic and fast-growing market,” he said. Growth has been astronomical, Cassin concurred. It is driven by several factors, including:

• capital lockups of 10‑15 years in the private markets;
• a marked decline in distributions, due in part to the sluggish M&A and IPO markets and high interest rates;
• LP capital constraints and concentration limits;
• the growing size of new funds; and
• shorter fundraising cycles.

The secondaries market serves as a “pressure relief valve” for those competing forces, Cassin added. Continuation vehicles now account for half of the overall secondaries market, and that proportion is likely to increase relative to M&A and IPO exits. The primary reason is that sponsors want to preserve the potential upside. “If given the option, why would an existing sponsor want to sell a high conviction asset to a competitor and watch that competitor accrue value?” he reasoned.

The market will continue to grow, Leone agreed. “Right now, the most popular transaction out there is the trophy asset, single-asset deal,” he said. Such deals presently account for about 70 percent of continuation transactions. However, there is likely to be an increase in the number and proportion of multi-asset tail-end deals. The reason is that there are presently about 32,000 portfolio companies held by PE firms, including a huge backlog of exits and average holding periods now exceeding seven years. Additionally, fundraising for continuation vehicles has doubled in the past decade. “Not every GP has a trophy asset, but almost every GP has a tail-end portfolio,” he observed.

See “Dechert and Mergermarket 2026 PE Outlook: Fundraising Difficulties Stoke Demand for Assorted Liquidity Solutions” (Jan. 22, 2026); and “Secondaries Unlocked: A Market Grown Up and Continuing to Evolve” (Nov. 13, 2025).

Inherent Conflicts

GP‑led secondaries all have a similar structure, Leone explained. The GP of a PE fund sets up a new fund as the continuation vehicle. The GP seeks new investors to capitalize the continuation vehicle, which then buys assets from the existing fund.

Because the GP is on both sides of a GP‑led secondary, the transaction has an inherent conflict of interest, with the GP owing fiduciary duties to both the buyer and seller, Gertner said. Moreover, the sponsor not only orchestrates the transaction, but also benefits from it, Cassin added.

See “Conflicts of Interest in an Evolving Landscape: Potential Areas of SEC Examination Risk for GP‑Led Secondary Transactions” (Mar. 20, 2025).

Private Litigation Over Continuation Vehicles

There has been both regulatory scrutiny and private litigation over continuation vehicles, Miller explained. For example, in an action commenced in 2025 in the U.S. District Court for the Southern District of Florida, the plaintiff alleges that the manager improperly valued an asset.

Additionally, a sovereign wealth fund sued a fund manager in Delaware Chancery Court in 2025, alleging breaches of fiduciary duty and the implied covenant of good faith and fair dealing in connection with a GP‑led transaction, Miller recounted. A minority investor in one of the portfolio companies also claims the transaction was infected by advice from counsel that was advising both the portfolio company and the fund manager.

The complaint in the Delaware Chancery Court highlights the importance of clear communications and a robust process for continuation transactions, Cassin said. The complaint reads like “a checklist for sponsors of what not to do,” he remarked. First, it alleges the sponsor sought to control the outcome of the approval process by suppressing communications among LPs and the LP advisory committee (LPAC), including using a “divide and conquer” approach, as well as establishing – and then shortening – deadlines for decisions by the LPs.

Second, the sponsor provided different information to the existing fund LPs, on the one hand, and new investors in the continuation vehicle, on the other, Cassin continued. For example, the sponsor:

• provided different projections on the potential outcome of a portfolio company IPO; and
• described certain information as the “base” case to one group and as the “upside” case to the other.

Finally, the sponsor allegedly only gave certain investors access to the data room toward the very end of the transaction. The litigation illustrates that “while conflicts in GP‑led transactions are inevitable because they are inherent as part of the structure, failures in communication and process, such as those alleged in the complaint, are not,” Cassin advised.

See “Delaware Court Grants LPAC Member’s Emergency Request to Block Continuation Vehicle Transaction” (Feb. 5, 2026).

Such private litigation should not deter sponsors from pursuing continuation vehicles, which are “incredibly popular and prevalent,” Miller observed. “In my experience, the vast majority of continuation vehicles are run properly and have proper disclosure and structuring, which results in a win-win-win for all parties,” Cassin added.

However, “as a person who spent countless hours of her professional life reading other people’s email, text messages and off-channel communications, I can tell you it’s really important to keep communications and email hygiene best practices in mind when there’s any risk of litigation,” Miller advised. With the benefit of hindsight, communications may be seen as sloppy, speculative or even evidence of fraudulent intent. Thus, sponsors should be cautious and professional in their communications. When discovered in litigation, communications can have a significant impact on parties’ appetite to settle.

Common Conflicts in Continuation Vehicles

Pricing

Determining the price the continuation vehicle will pay for assets purchased from the original fund is one of the most significant conflicts in a GP‑led secondary, Gertner noted. At the start of a continuation transaction, the sponsor owes fiduciary duties to investors in the existing fund – not potential investors in the continuation vehicle, Leone stressed. “The goal always has to be to achieve the highest price,” even if there could be certain benefits from a lower price (e.g., quicker transaction process), he said.

“The market decides on pricing,” according to Leone. There should be a robust test of asset values in the market, which entails broad-based outreach by or on behalf of the sponsor. Other indicators of value include, for example, a recent sale of a minority interest in the portfolio in question or a recent closed financing round. Still, the best way to demonstrate the sponsor has achieved the best price is by showing broad and unrestricted pricing outreach.

See our two-part series: “Trends in the GP‑Led Secondaries Market and Criteria for Investors to Evaluate Opportunities” (May 31, 2022); and “Pressure Points When Performing GP‑Led Secondaries, Including Valuations and Conflicts of Interest” (Jun. 7, 2022).

Carried Interest

When the existing fund is in carry mode, crystallization of carry on the sale benefits the GP, Gertner said. Even if the GP does not cash out and rolls carry into equity in the continuation vehicle, the GP will benefit from appreciation in the continuation vehicle. The conflict may be even worse if the selling fund is not already in carry mode, because the GP resets the carry in the continuation vehicle. “Thus, if the carry was at $100 and now it’s at $80 in the continuation vehicle, then the GP benefits 20 percent from the delta,” he explained. The lower the purchase price, the greater the benefit to the GP.

The GP will also get carry on the new money coming into the continuation vehicle. “The GP is almost always better off in the transaction economically,” Leone observed. Consequently, there must be a process that shows that there was a true arms-length transaction.

See “Evolution and Future of GP‑Led Restructurings: Transaction Structuring Trends and Conflicts of Interest Management (Part One of Two)” (Jun. 2, 2020).

Allocation of Deal Expenses

Another area where conflicts arise is in the allocation of deal expenses, which can be substantial in a continuation transaction, Cassin said. There are fees for attorneys, brokers, valuation experts, fairness opinions and, in most recent transactions, representations and warranties insurance. Some expenses are allocated to the investors in the original fund that elect not to roll into the continuation vehicle, others are allocated to investors in the continuation vehicle and still others are split between the two investor groups. Overallocating expenses to existing investors is a particular concern.

See “Using RWI to Facilitate Distributions and Mitigate Risks in Continuation Vehicles and Other Tail‑End Funds” (Mar. 19, 2026).

Investor Relationships With Sponsor

An evolving type of conflict is relationship-based, Cassin continued. Increasingly, large buyers of secondaries may also have interests in the sponsor or existing sponsor vehicles. Some buyers have groups or affiliates that invest in GP stakes. Others may have investments both in a sponsor’s flagship fund and in a co‑investment vehicle, which may have more favorable terms than the flagship fund (e.g., more favorable LP clawbacks).

All such situations create real or perceived conflicts that must be managed. The best way to manage them is through disclosure, which is usually done in the confidential information memorandum (CIM) the sponsor sends to all LPs, Cassin advised.

See “Negotiating GP Stakes Investments Amid the Looming Threat of Control Transactions” (Sep. 18, 2025); and “Four Distinct Ways to Structure Minority Stake Investments” (May 7, 2024).

Attorneys’ Duties

Attorneys’ obligations are distinct from those of the sponsors they represent, Miller noted. Attorneys, of course, have duties to maintain confidentiality of client information and to act with diligence for their clients.

Additionally, the duty of loyalty requires them to act in a manner that is free from conflicts of interest, Miller said. Rule 1.7 of the Model Rules of Professional Conduct provides that a lawyer may not represent a client if the representation will be directly adverse to another client, or where the engagement risks being limited by duties to another present or former client; a third party; or the lawyer’s own interests. A lawyer may proceed with a representation if the lawyer reasonably believes the lawyer can provide competent and diligent representation and obtains the client’s informed written consent.

Additionally, there is a presumption in New York that when there is a concurrent representation of two clients, information will be shared between the clients, Miller continued. Thus, the best practice if a lawyer plans to represent both a portfolio company board and a sponsor is to disclose the sharing of confidential information and any potential conflicts, while also obtaining informed written consent.

See our two-part series: “Importance of In‑House Counsel Discerning Their Client and Managing Evolving Attorney‑Client Privilege Issues” (Jun. 21, 2022); and “Tips for How In‑House Counsel Can Navigate Typical Ethical Dilemmas and Conflicts of Interest in the Role” (Jun. 28, 2022).

Managing Conflicts

Disclosure

Deal documents typically disclose potential conflicts, including those involving counsel, Gertner said. The Institutional Limited Partners Association has issued guidance on continuation transactions as well as a disclosure template. Disclosures come in two forms, Leone noted. Sponsors make formal disclosures in a document that may run from 500 to 1,000 pages. There are also less formal early communications with both LPs and the LPAC so they know what to expect.

Symmetry of information is critical, Cassin added. For example, if the sponsor is responding to questions from the lead investor in the proposed continuation vehicle, then the sponsor should share the responses with all parties through the deal’s data room. “Parity of information is paramount in these deals,” Leone concurred. To that end, all parties should have access to the same data room.

See “ILPA Guidance Promotes Equitable Framework for Continuation Fund Transactions” (Jul. 27, 2023).

Process

The case brought in the Delaware Chancery Court by a sovereign wealth fund alleging violative continuation vehicle transaction processes is a lesson in what fund managers should not do. LPs and LPACs need time to digest and understand the proposed transaction. “It’s process over price. The price will come if you run a good process” that ensures communication and the opportunity for feedback, Leone advised.

GPs must run a robust deal process to mitigate potential conflicts, Gertner said. An adviser must not rush LPs into making a decision, Cassin emphasized. It is customary to give LPs 20 business days to review the CIM and decide whether to participate in the transaction. Sponsors should not seek to shorten that period. Moreover, they should extend it when there is a supplemental CIM with a material change for them to consider.

“Valuation of the underlying asset is at the core of these transactions,” Miller said. As all parties must be able to conduct robust diligence on valuation, the SEC and DOJ are both focused on situations where there is “a potential disparity in access to information,” she observed.

See “How Good Governance Frameworks Can Optimize Outcomes in Continuation Funds” (Mar. 15, 2022).