The EMG lawsuit making the rounds is real - and it’s spectacular!

A Middle Eastern sovereign wealth fund sued to stop a Continuation Vehicle (CV) transaction, alleging the GP told existing LPs that Ascent Resources was in bad shape and couldn't be sold, while telling prospective CV investors the exact opposite. Different data to different investors. Rushed votes. No LP coordination allowed.

Sound familiar?

Many years ago, we faced something similar. A 10+ year-old, pre-GFC fund that wouldn't get into carry. Ten assets left. The GP - who absolutely planned to raise future funds - proposed a deal that looked terrible from where we sat.

Five companies would roll into a continuation vehicle. Five would stay behind.

Perfect cherry-picking. We kept the duds and the monitoring burden. They got to reset the clock on the winners.

The continuation vehicle itself looked like a good investment. The five companies had real upside. The pricing seemed reasonable.

This is a completely different game than blind pool investing.

In a normal fund commitment, you're backing a GP's ability to source, select, and manage a portfolio. You're evaluating their track record, their strategy, their team. You don't need to underwrite specific assets at specific prices.

In a continuation vehicle, you're suddenly doing direct investing. You need to evaluate specific companies. Understand their markets. Assess management teams. Model cash flows. Judge whether the value creation plan is credible.

Different skillset. Different resources. Different game entirely.

And here's the thing: we couldn't do it properly. Not to the standard required to commit capital with confidence.

We were LPs, not direct investors. We didn't have the sector expertise. We didn't have the team to do proper due diligence on five middle-market companies. We couldn't evaluate whether the projections made sense or the follow-on capital requirements were reasonable.

But even if we could have evaluated the assets, there was a bigger issue.

Cherry-picking winners for themselves.
Leaving LPs with the losers.
Resetting fees.
Resetting carry.
Resetting timelines.

Alignment isn't measured by how a GP behaves when things are going well - it's measured by how they behave when things are inconvenient. And it's only real when it costs the GP something.

And here, they made a choice.
A clean full-fund transfer was an option.
It would have treated LPs fairly.

They chose the version that maximized short-term economics for themselves instead.

We said no.

Not because we couldn't see the investment opportunity.
Not because the returns looked bad.
But, because we couldn't properly evaluate the assets.

And because the GP had already shown us they were willing to structure deals that benefited them at our expense.

The cherry-picking was the tell. The poison pill was the punchline. They weren't offering us optionality - they were offering themselves a fee reset.

The GP could have proposed a clean continuation vehicle - transfer the entire fund over, maintain the economics, give everyone optionality. That was possible.

They chose the cherry-picked structure instead.

Once a GP shows you who they are, believe them.

The EMG situation, if the allegations are true, is just a more extreme version of the same dynamic. LPs being asked to make direct investment decisions without the capabilities to do so properly. GPs structuring deals where incentives are stacked against existing investors. Information asymmetry. Rushed timelines.

Continuation vehicles aren't inherently bad. Clean structures where the full fund transfers can make sense.

But cherry-picked CVs from out-of-carry funds? Those are zombie fund extraction mechanisms wearing investment opportunity clothing.

The rule

If you can’t underwrite the assets, don’t participate.
If you don’t trust the GP’s integrity, don’t participate.

If both pass, then it’s an investment decision.

Only one this week, but it’s a big one.

This section above is entirely made by AI with a human-in-the-loop. If you are interested in AI use cases, please reply to this email.