Carlyle to make 7x on sale of Eggplant Technologies, Periscope Equity hits market with second tech-focused fund, SEC finds conflicts in how GPs allocate coinvestments

SEC puts GP coinvestment allocations under the microscope while Carlyle is set to reap big returns from its sale of Eggplant.

Happy Friday!

Hope your week has gone well.

Surprisingly, considering the pro-business stance of the Trump Administration, the SEC hasn’t seemed to ease up on its scrutiny of private equity.

The agency has continued to run its examinations of private equity firms, with the occasional enforcement action. Many of the settlements reached this year between PE firms and the SEC were initiated under Trump.

All the examination work gives the SEC an intimate view of how firms are complying with rules and regulations, not only imposed externally but also set out in their own fund contracts. This week, SEC published a risk alert based on a swath of findings from its examinations this year, highlighting areas of most risk.

One such area is coinvestments, which have grown in popularity over the years as limited partners look for more direct exposure to investments in a no- management, no-performance-fee structure. Essentially, coinvestments can represent fatter returns at lower cost. They can also represent greater risk considering the concentrated exposure they bring to LP PE portfolios, which are mostly comprised of passive stakes in a plethora of funds that cut across sectors and strategies.

Much of what the SEC is concerned about with private equity is adequate disclosure from GPs on how they run their businesses. When it comes to coinvestment, GPs should be transparent about how and to whom they are offering coinvestment opportunities. Policies should be set out governing those processes, and GPs should follow those policies.

SEC has found that GPs have not provided adequate disclosure about allocating coinvestment opportunities and, perhaps more surprisingly (depending on your level of cynicism), have not followed their own LPA policies that govern coinvestment allocation.

Read my story here. What have you seen around allocation of coinvestment opportunitites? Reach me at cwitkowsky@buyoutsinsider.com.

Fees: Also interesting in the risk alert is that GPs apparently still can’t figure out how to properly charge fees and expenses to LPs. One source commented to me this week that, you’d think firms would have a good handle on properly charging investors after years of enforcement actions focused specifically on improper fees and expenses.

SEC said GPs overcharged investors for shared expenses for broken deals, due diligence, annual meetings, consultants and insurance costs. Also, GPs charged the fund for expenses like salaries of personnel, compliance, regulatory filings and office expenses that were not permitted in the fund contracts.

Top Scoops
Periscope Equity is targeting $200 million for its second fund that focuses on technology-enabled business services investments, writes Kirk Falconer on Buyouts.

Tech-focused buyout and growth equity fundraising was robust last year and in early 2020, with an increasing number of emerging and established managers entering the space. Tech is one sector in the pandemic downturn that many sources believe has not taken as much damage as others more directly connected to the health lock down, like hospitality and restaurants. Read Kirk’s story here.

Carlyle Group is set to make 7x its money on its sale of Eggplant Software to Keysight Software, writes Milana Vinn on PE Hub. Milana first reported that Keysight was set to acquired Eggplant way back on May 27. PE Hub readers got the scoop long ago! Check out Milana’s story on Carlyle’s return on the exit here.

Have a great weekend! Hit me up as always with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com, on Twitter or find me on LinkedIn.