Buyout firms' hushed deals with top investors risk US regulators' ire

Tue Aug 30, 2016 5:00am EDT
 
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By Koh Gui Qing

NEW YORK Aug 30(Reuters) - Some U.S. private equity firms are courting their biggest and savviest investors with privileged access to special fee-saving deals without telling other investors, according to people involved in buyout firms' fundraising.

The U.S. Securities and Exchange Commission (SEC) has signalled its interest in overseeing such deals after fining several private equity firms in recent months for improper disclosure of fees.

The so-called co-investments allow institutional investors such as pension funds and sovereign wealth funds to invest in target companies, both through the fund and directly without incurring some of the usual management and performance fees, which can translate into millions of dollars of savings.

Due to the big discount in fees, co-investments are popular among investors, and some buyout funds are giving their largest and most sophisticated investors a chance to participate in them before their peers without telling smaller investors about such arrangements.

However, keeping smaller investors in the dark about the way the deals are awarded risk scrutiny from the SEC, say private equity lawyers.

Any omission of "material facts" that may alter an investor's decision to invest in a fund violates rule "10b-5" of the Exchange Act, a person familiar with the SEC's thinking said. Information about the distribution of co-investment deals is likely to be considered "material", the person said.

Given the confidentiality of the arrangements, and the fact that some agreements are not even in writing, it is difficult for the SEC to spot infractions unless alerted by a whistleblower, the person said.

The SEC declined to comment for this story. Last year, however, the regulator called on the private equity industry to adopt a "robust and detailed" co-investment policy that is shared with all investors.   Continued...