GPs buttress PPMs, LPAs with co-investment disclosure

  • Co-investments roped into fee-and-expense focus by regulators
  • SEC actions not expected to chill co-investment activity
  • Recent moves by SEC on this front aren’t the last: lawyers


Private equity firms continue to strengthen disclosure to limited partners about co-investment programs as the SEC maintains its emphasis on transparency, according to a lawyer who works with GPs.

While the SEC has been consistently advising sponsors to develop detailed co-investment policies and share them with all investors, GPs’ efforts to comply with this regulatory mandate are just now becoming more widely known. LPs are also weighing in by more frequently requesting written allocation policies for co-investments, lawyers who work with GPs say.

Typically, the additional communications on co-investments appear in private prospectus memoranda, or PPMs, in the fund LP agreements, or in both.

“Where firms used to disclose fees and expense in one page in their [LPAs,] now it is several pages,” said Norm Champ, partner in the investment-funds group at Kirkland & Ellis LLP and an SEC veteran. “People are beefing up disclosure.”

Partly because co-investors pay lower fees than the traditional 2 and 20 charged to LPs in a fund, the practice of co-investments generally falls into the same bucket as fee and expenses disclosure, legal experts said.

That issue emerged as a central theme not only in Apollo Global Management’s $52.7 million SEC settlement this summer, but also past regulatory actions with Blackstone Group and Kohlberg Kravis Roberts & Co and others.

Champ, who worked at the SEC from 2010 to 2015 including as director of the investment-management division, said he expected more settlements in this vein. “The SEC is very, very active,” he said. “Whether it’s exams or enforcement, you name it. They’re out there. It’s very busy. They’re looking.”

Matt Dickman, partner at Kirkland & Ellis’s private-funds group and a specialist in fund formation, said investors are more frequently requesting allocation policies. LPs remain intrigued by co-investments despite the regulatory scrutiny, but not every investor has enough boots on the ground to actually take part in them, he said.

“It’s a different capability to evaluate a manager and make a commitment to a fund, and then write a check when the capital is called, as opposed to doing the underlying diligence in a deal,” he said. “Larger investors that have that capability are trying to take advantage of [it].”

Historically, most co-investments were offered to existing investors with no fee and no carried interest, but that’s starting to change, he said. “We’re starting to see a lot more sponsors charging fees and carry on co-investments,” he said. “There’s no set standard, but it’s typically less than 2 and 20.”

Typically, GPs don’t lay out specific rights to co-investments in writing, he said. “Most of them are based on discussions with a specific investor,” Dickman said. “It’s not correlated with the size of their investment in a fund. It’s more to do with the investor’s capability to execute and their interest in doing the deal.”

And it’s not just larger sponsors that execute co-investments, he said.

“I have a number of clients in the $400 million fund size that are using them so they can keep their funds smaller,” he said. “They talk to investors interested in it so that everybody in the fund is aware of the practice.”

Marc Wyatt, director of the SEC’s office of compliance inspections and examinations, told Buyouts in an email, “We recognize that the importance and interest in co-investment has grown and we continue to focus on compliance and investor-protection issues surrounding co-investments, co-investment allocation and the allocation of costs and fee offsets related to co-investments.”

Reuters reported recently that some U.S. PE firms are courting larger LPs by offering access to co-investments, without telling other investors. The story mentioned GIC, which is Singapore’s sovereign wealth fund, as well as Canada Pension Plan Investment Board. (See story.)

Wyatt said in a May 2015 speech that the commission has been dedicating resources to co-investment allocation.

“We have detected several instances where investors in a fund were not aware that another investor negotiated priority co-investment rights,” he said. “Allocating co-investment opportunities in a manner that is contrary to what you have promised your investors can be a material conflict and can result in violations of federal securities laws and regulations.”

Action Item: Marc Wyatt’s speech:

Norm Champ, partner in the investment-funds group at Kirkland & Ellis LLP and former director of the SEC’s investment-management division. Photo courtesy of Kirkland & Ellis.