Cross-Transaction Was Not Consistent with Disclosure to LP Committee
The SEC fined and censured a registered real estate private equity firm for engaging in a cross transaction between two funds it managed on terms that differed from those disclosed to its LP committee. According to the SEC, the fund manager committed to the selling fund’s investor advisory committee (IAC) that the purchasing fund would reimburse the selling fund for certain development expenses related to the subject property. The fund manager later determined that the selling price already assumed the development costs and, therefore, declined to reimburse the selling fund. However, the fund manager never disclosed to the IAC that it would not reimburse the selling fund. When the transaction was uncovered during an SEC exam, the fund manager paid $4.5 Million to reimburse the selling fund’s limited partners.
OUR TAKE: Private equity firms can overcome conflicts of interest through disclosure to, and consent by, an independent LP committee. However, hiding the ball from the LP committee can result in significant penalties and make your firm look less than transparent.