SEC Permission Required for Fund to Invest in Portfolio Company Held by Affiliated Fund
The staff of the Division of Investment Management has warned the private equity industry that business development companies must obtain an SEC exemptive order before investing in portfolio companies controlled by a private fund sponsored by an affiliate. The staff described “certain private funds” registered as BDCs that hold securities issued by portfolio companies controlled by other private funds under common control of the BDC’s adviser. The staff believes that such a transaction violates the affiliate transaction prohibition of Section 17 of the Investment Company Act and would require exemptive relief.
OUR TAKE: Whether or not your fund is registered as a BDC, the staff makes clear that a conflict of interest arises when a private equity fund invests in portfolio companies held by an affiliated fund. A registered adviser should consider the compliance implications of the transaction: prohibit, obtain consent, and/or disclose.
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