SEC subpoenaed CalPERS for communications with Silver Lake

The Securities and Exchange Commission earlier this year subpoenaed California Public Employees’ Retirement System for communications with Silver Lake related to investments it has made with the firm.

Several sources described it as an unusual move by the agency, and it could suggest a broader, more serious investigation than previously reported.

The SEC subpoena asked for communications between the pension and Silver Lake about accelerated monitoring fees, management-fee offsets and co-investment opportunities, according to an internal CalPERS memo from May viewed by Buyouts. That suggests an investigation that goes beyond just accelerated monitoring fees, the focus of a Wall Street Journal article Aug. 19. The WSJ article said the investigation could lead to no action being taken.

The internal memo said CalPERS is not the subject of the SEC investigation. CalPERS owns and has been selling down a stake in Silver Lake’s management company, according to the firm’s Form ADV. The firm is also a limited partner in at least four Silver Lake funds, including its second, third and fourth core funds from vintage years 2004, 2007 and 2013.

Spokespeople for Silver Lake, the SEC and CalPERS declined to comment.

Unusual move

According to the agency’s website, the SEC can subpoena witnesses to “testify and produce books, records and other relevant documents” once it obtains a formal order of investigation.

Several sources said they had not heard of the SEC issuing subpoenas of limited partners as part of investigations in other cases.

However, George Kostolampros, an attorney with Venable who works with private equity firms, said that, while uncommon, he has seen the SEC subpoena LPs seeking information. Kostolampros had no specific information or connection to Silver Lake.

“It’s a matter of finding as much information as possible and tracking down information and corroborating what’s there and what’s not there,” Kostolampros said. “The SEC [wanted] to do more diligence in finding out what’s been sent out to LPs.”

Other sources said the SEC might be searching for non-official information, such as marketing emails.

New policy

The use and disclosure of accelerated monitoring fees has become a hot-button issue that has led to penalties for other firms. Fee acceleration occurs when a GP accelerates full payment of a monitoring contract with a portfolio company prior to the contract’s natural term, which usually runs for 10 years. Critics have described fee acceleration as GPs getting paid for doing no work; firms can counter that investors benefit from the fees (through offsets) and that they are disclosed to investors.

Silver Lake last year adopted a policy that lets it collect accelerated monitoring fees only if it meets one of two criteria, Buyouts reported in June. The first is that the fee must benefit LPs, taking into consideration current and future advisory fees available to be offset against the management fee, according to Silver Lake’s Form ADV.

Second, LPs must be no worse off by the firm accepting the fee, through a fee offset equal to the potential cost of the firm accepting the fee, the Form ADV said. That offset must be disclosed to fund LPs.

Sources told Buyouts last year the firm did not establish the policy because of pressure from LPs or the SEC, but rather to codify what it had been doing in the past. After fee acceleration became an SEC focus, the firm examined all the fee-acceleration payments it had collected and determined LPs were either better off or at least made whole in each case, one of the sources told Buyouts at the time.

The SEC has been busy this summer, racking up fee-related settlements since June with Apollo Global Management, WL Ross & Co. and Blackstreet Capital Management. Apollo’s $52.7 million settlement with the SEC was the largest the agency won from a private equity firm since it started regulating the industry in the wake of the 2010 Dodd-Frank Financial Reform act.

Action Item: Check out Silver Lake’s Form ADV here: http://www.adviserinfo.sec.gov/IAPD/Part2Brochures.aspx?ORG_PK=161206

Jim Davidson, co-founder and chairman of Silver Lake, speaks at a panel discussion “Private Equity: Where Risk Meets Opportunity” at the 2009 Milken Institute Global Conference in Beverly Hills, California, on April 28, 2009. Photo courtesy Reuters/Fred Prouser