Secondary Liability Risks for Private Equity Funds in Portfolio Company Wind-Downs

Private equity funds typically structure investments with the expectation that liability will be contained at the portfolio company level. When a business fails, the fund may lose its investment, but the fund itself is thought to remain insulated.

That boundary, however, is not absolute. In certain circumstances, courts have considered whether liability for pension obligations or workforce issues should extend upstream. A recent case highlights both the risks and the uncertainty.

Pension Liability and the “Trade or Business” Question

Under ERISA’s Multiemployer Pension Plan Amendments Act of 1974 (MPPAA), an employer that withdraws from a multiemployer pension plan may be liable for its share of underfunding. Importantly, the term “employer” includes not just the entity that ceases operations, but also any trades or businesses under common control.

The critical question is whether a private equity fund qualifies as a “trade or business.” Courts have applied different tests, including the “investment plus” framework developed in the Sun Capital litigation. Under this standard, a fund may be considered a trade or business if it goes beyond passive investment into active involvement in management.

The Longroad Case

In Longroad Asset Management v. Boilermaker-Blacksmith National Pension Trust (W.D. Mo. Aug. 19, 2025), the court addressed whether various PE entities could be held liable for nearly $1 million in pension withdrawal liability after a portfolio company entered bankruptcy.

The court concluded that:

• The management company and general partner were not liable, emphasizing their limited activities.
• The fund itself could qualify as a trade or business, and therefore potentially be liable, because its activities went beyond passive investment.

The decision underscores the fact-specific nature of the inquiry. The outcome turned on how the fund’s activities were characterized, and the court’s reasoning illustrates the uncertainty sponsors face when navigating a wind-down.

Beyond Pensions

Similar questions arise under other statutes. For example, under the WARN Act, courts have in some cases treated PE funds and portfolio companies as “single employers,” exposing funds to liability for layoffs without proper notice.

In addition, when portfolio companies fail, courts and creditors often scrutinize upstream payments such as management fees, dividends, or leveraged distributions to determine whether they contributed to insolvency or unfairly shifted value away from creditors.

Practical Considerations

While fund-level liability may not be common, it is a real risk. Here are some points to keep in mind:

• Outcomes turn on specific facts and how courts apply unsettled legal standards.
• Execution matters: governance, timing, and creditor communications in a wind-down can influence how courts view a relationship between fund and portfolio company.
• Upstream payments may draw scrutiny, especially when they coincide with financial distress.

Conclusion

Private equity funds cannot assume that liability always stops at the portfolio company. Careful planning and disciplined execution in the management of portfolio company wind-downs is critical to reduce both financial and legal risk.

If you have any questions or require assistance, please contact David Dragich.