Private Equity Firm Failed to Obtain Approval for Co-Investments
The SEC fined and censured a private equity fund manager for failing to obtain advisory board approval for co-investments. According to the SEC, the respondent co-invested in portfolio companies along with funds managed by an affiliated adviser. The applicable limited partnership agreement required the approval of the LP advisory board before co-investing with an affiliate. The SEC charges that over a 6-year period, the respondent’s funds co-invested in 4 portfolio companies without obtaining the required consent. In most cases, the funds invested pro-rata, but at least one investment resulted in dilution for the related funds. When ultimately presented, the advisory board declined to ratify the prior co-investment transactions.
OUR TAKE: The SEC is using the LPA as an enforcement tool. The violation of the LPA becomes re-characterized as a breach of fiduciary duty and failure to disclose. Presumably, the limited partners had a private claim for violations of the LPA, although the SEC does not indicate that they ever took such action. Private equity firms should spend some compliance time ensuring they comply with the terms of their LPAs and offering documents.