In light of the many infractions the SEC has discovered while scrutinizing the private equity industry, why would a lawmaker think it’s a good idea for GPs to throw away fundraising due-diligence communications between GPs and LPs?
I’m referring to HR 5424, the Investment Advisers Modernization Act of 2016, sponsored by Rep. Robert Hurt (R.-Virginia). The bill calls for various measures that would roll back parts of the Dodd-Frank financial reform act — the most bizarre of which is the measure to allow GPs to chuck informal, confidential marketing communications.
The House of Representatives approved the bill, and it heads to the Senate, where it will likely stall. Some believe, however, that the bill could be attached to a larger, must-pass bill, pushing it through the back door, the New York Times reported. President Obama has vowed to veto the bill if it makes his desk.
This odd marketing measure goes to the very heart of whether a GP is being up front and transparent about what it is offering to potential investors. These informal fundraising communications, which serve as a potential investor’s due diligence into whether to commit to a fund, paint perhaps the best picture of a GP’s promises while marketing a new fund.
Sure, these types of communications are not codified into the most important document, the limited-partner agreement, but these types of communications give a view into how the GP tried to sell himself.
Here the SEC and LPs can discover if a GP was using inflated valuations on investments or whether a manager promised certain LPs special benefits — off the radar — not available to other investors in a fund.
I can’t figure out the benefit in setting down in law that a GP can simply take all those emails, letters, DMs, and eliminate them in a great cleansing fire, never to be seen again. This sort of informal messaging is the kind of thing investigators love to get their hands on, to corroborate theories about a GP’s potential wrongdoing or to illustrate that a GP was playing by the rules.
I reported recently the SEC subpoenaed California Public Employees’ Retirement System for communications with Silver Lake about fee acceleration, fee offsets and co-investments. Sources have told me the SEC could be probing for informal communications to corroborate other information it’s gathered. The Wall Street Journal reported last month the SEC is investigating Silver Lake over accelerated monitoring fees. Silver Lake has declined to comment on the situation.
The bill passed the House after being amended. The amendment eliminated the original proposal to exempt GPs from filing brochures that lay out for investors (and the public) in general terms a firm’s fee and carry structure, code of ethics, risk factors, ownership and a host of other interesting facts. We here at Buyouts read those things like cheap pulp sci-fi on a rainy Sunday afternoon.
So that’s gone, amended away, and a good thing. But we’re still left with this inexplicable protection of a GP’s right to eliminate informal fundraising marketing materials (among other things).
Luckily (for me as a journalist, anyway), those due-diligence communications go two ways. We like to hope that LPs diligently document those communications, lock them away in a drawer somewhere, and have them ready if sometime down the line questions about a GP’s practices arise.
Feel free to email me, or use our PE Hub anonymous tip line, if you feel the need to share any of that kind of info — just in case this bill actually becomes reality.
Action Item: See the text of the bill here: https://www.congress.gov/bill/114th-congress/house-bill/5424
Photo: Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky