Affiliated Private Equity Funds Seek Permission to Co-Invest
A private equity fund sponsor is seeking SEC approval to allow a registered BDC to co-invest in portfolio companies alongside affiliated private funds with similar investment objectives. Such transactions would violate the Investment Company Act’s prohibitions on joint transactions without obtaining such exemptive relief. The applicant has been seeking relief at least since 2009 and has amended its application 6 times over this 4-year period. Conditions included in the current application include the following: (i) approval by independent directors, (ii) quarterly reporting to the independent directors, (iii) pro-rata allocation of investment opportunities, (iv) fair apportionment of fees and expenses, and (v) equal distribution rights.
OUR TAKE: Private equity fund sponsors should consider some of these conditions before co-investing. Although the SEC could not charge a violation of the Investment Company Act, the staff could allege a breach of fiduciary duty if one fund were somehow disadvantaged in the co-investment process. The staff obviously has concerns if it still has declined to grant exemptive relief after 4 years and 6 amended applications.