Sorry for the delay in responding. It's travel season so It is hard to keep up.
The issue is likely due to the request to use the new connection group format. I'll look into it the next time I'm home for a few days. Until then, you could use the external tool to create the connection group file and run the powershell yourself.
I've noticed my AppV_Manage install can't create connection groups. While available sequences are appearing correctly in the initial list (both PackageID and VersionID are visible), when I go to add a sequence to the group, the VersionID section is not being populated. This results in the VersionID being blank in the XML and as such it reports as invalid when invoked. If I manually apply the VersionID to the file and re-run the add command it works fine so it's definitely just this that's the problem.
I had a quick look but didn't see any detail on this issue so am wondering if it's exclusive to me. Has anyone else seen this and if so how did you fix it? I have App-V Client version 5.0.3400.0 installed (5.0 SP2 HF4) and the problem persists with AppV_Manage v4.0, v188.8.131.52, v184.108.40.206 and v220.127.116.11, all (where relevant) set to NOT use new connection group format, via the Tool Config page.