SEC crackdown spurs caution, AI uptake in PE valuations
The gist
The SEC’s crackdown on private equity continuation vehicles is forcing firms to get smarter—and more transparent—about how they value assets and charge fees.
What to know
- SEC enforcement investigations are zeroing in on conflicts of interest and opaque asset valuations as continuation vehicles explode from $70B in 2024 to $106B in 2025.
- Nearly two-thirds of private equity managers are now bringing in outside legal counsel and deploying AI tools to clean up fee and expense practices.
- A shift to semiannual reporting means firms like Blackstone and KKR may have to rely on stale data, making accurate valuations—and investor trust—harder to achieve.
SEC Targets PE Conflicts
A surge in continuation vehicles has triggered a sweeping SEC investigation, with regulators forming a cross-division task force to confront fraud, valuation opacity, and systemic risks in private equity.
By mid-2026, the SEC launched a high-profile enforcement investigation into private equity continuation vehicles, spotlighting concerns over conflicts of interest, asset valuation methodologies, and the sufficiency of investor disclosures amid allegations of fraud and transparency lapses. SEC Chairman Paul Atkins and Enforcement Director David Woodcock have publicly emphasized the agency’s commitment to scrutinizing liquidity, fees, valuations, and conflicts of interest risks, orchestrating a cross-division working group to tackle these multifaceted challenges.
This regulatory probe is driven by the explosive growth of continuation vehicles, with manager-led secondary transactions soaring from $70 billion in 2024 to $106 billion in 2025, according to Evercore data. Such rapid expansion has amplified systemic risk concerns within private markets, as continuation vehicles increasingly permeate both equity and credit transactions, prompting the SEC to treat them as a recurring and potentially destabilizing feature warranting intensified oversight.
Valuation Tensions Intensify
Dual roles in continuation vehicles force advisors to navigate conflicting interests and subjective asset valuations, drawing heightened scrutiny to disclosure gaps and the integrity of fee calculations.
Continuation vehicles inherently present conflicts of interest because the same investment advisor often manages both the selling fund and the new continuation vehicle, creating competing incentives around asset valuation. As Nick Tsafos and subsequent analyses emphasize, the advisor must balance ensuring selling investors receive fair value for the risks they undertook while offering incoming investors a reasonable price, a tightrope complicated by the advisor’s dual role on both sides of the transaction. This dynamic intensifies scrutiny from regulators like SEC Enforcement Director David Woodcock, who highlights concerns around liquidity, fees, valuations, and conflicts permeating the distribution chain.
Valuing illiquid assets within continuation vehicles remains a highly subjective and complex challenge, significantly impacting performance fees and track records, thereby exacerbating conflicts of interest. Tsafos points out the difficulty in reconciling old and new investment theses as assets transition, requiring independent due diligence that goes beyond financial models to assess underlying business changes. This subjectivity has drawn regulatory attention, with the SEC recently settling enforcement actions against private fund advisors for inconsistent valuation methodologies during market stress that failed to reflect actual conditions or adhere to stated policies.
Pre-commitment disclosures related to continuation vehicles are often limited due to uncertainty about which assets will transfer and the terms involved, making ongoing conflict management and oversight by Limited Partner Advisory Committees (LPACs) critical. Because firms typically cannot specify upfront the assets or conditions of continuation vehicles, transparency throughout the lifecycle becomes essential to mitigate conflicts and align interests, especially under heightened regulatory expectations for accurate valuation and risk communication.
AI Reshapes Fee Practices
Mounting regulatory pressure and ambiguous legacy documents are pushing private equity managers to overhaul fee structures, with artificial intelligence now central to compliance and transparency efforts.
By mid-2026, continuation vehicles have transitioned from niche instruments to core components of the private equity toolkit, fundamentally reshaping fee and expense frameworks. This evolution is prompting firms to rethink traditional allocation models, especially as co-investment structures introduce complex dynamics around who bears what costs. Simultaneously, artificial intelligence is emerging as a transformative force, promising to overhaul how fees are calculated, monitored, and reported, thereby enhancing transparency and operational efficiency in an increasingly scrutinized environment.
Heightened regulatory scrutiny, with nearly 80% of private equity managers facing moderate to heavy SEC examination pressure, has driven a more conservative and legally cautious approach to fee and expense allocation within continuation vehicles. This regulatory spotlight has exposed ambiguities in legacy fund documentation, compelling nearly two-thirds of managers to seek outside legal counsel to navigate these complexities and ensure compliance amid evolving standards.
In response to both regulatory demands and the anticipated influx of retail capital, private equity managers are increasingly leveraging artificial intelligence not only for fee calculation but also for ongoing monitoring and compliance. This technological adoption reflects a strategic pivot to harness AI’s capabilities to meet evolving cost transparency expectations and streamline management fee processes in a landscape marked by growing cost scrutiny.
Semiannual Reports Cloud Data
Switching to less frequent reporting leaves firms dependent on outdated market data, raising the risk of mispriced assets and eroding investor trust in leading private equity names.
The SEC’s planned transition from quarterly to semiannual reporting poses significant challenges for private equity firms striving to maintain timely and accurate valuations. By reducing the frequency of public disclosures, firms will increasingly rely on older public comparables, which can introduce greater uncertainty and potentially distort financial assessments. This shift threatens to complicate valuation processes, as firms like Blackstone and KKR may find it harder to reflect current market conditions accurately, thereby impacting investor confidence and decision-making.