Last week the Securities and Exchange Commission settled with Veronis Suhler Stevenson over a 2015 deal involving the lower mid-market private equity firm’s 1998-vintage fund.
The SEC charges that VSS and managing partner Jeffrey Stevenson failed to provide limited partners in its $1.02 billion VS & A Communication Partners III fund with material information on a change in the vehicle’s valuation despite a live tender off process being carried out on the fund.
VSS and Stevenson, who had offered to buy LPs’ stakes, failed to disclose that the net asset value of the fund had risen subsequent to the offer letter and that the EBITDA of the fund’s two assets had risen as well, the SEC said.
According to a source familiar with the case, the valuation at the center of the SEC action was incomplete and preliminary.
VSS and Stevenson, who did not admit or deny the charges, have agreed to pay a $200,000 civil penalty to the SEC.
This isn’t the first time the SEC has fined a firm over a secondaries deal. In 2016 a managing partner at Maryland-based Blackstreet Capital agreed to pay $3.1 million to settle charges that he bought stakes from LPs in the firm’s second fund and subsequently directed capital calls to be waived on his own fund stakes.
It does appear, however, to be the first time the watchdog has censured a firm over an apparent conflict of interest related to a GP-led deal – an issue legal practitioners have long warned about. GPs have a fiduciary duty to act in the best interest of their LPs, including providing them with information relevant to their interests, as outlined in most limited partnership agreements.
In the VSS case, the conflict is particularly acute because the buyer of the fund stakes was managing partner and owner of the GP itself and a member of the fund’s investment committee. Such roles give access to portfolio valuation information to which a third-party purchaser would not have access. In other words: “inside information” as one legal expert familiar with the matter pointed out.
One question that remains unanswered is whether an advisor – whose compensation is typically based on the amount of NAV that trades – was involved in the process on Fund III (the SEC letter does not mention any such intermediary).
At the heart of the matter is the principle of “full and frank” disclosure. Timely and clear disclosure of information to existing investors is essential, as Gabriel Boghossian, a London-based partner at law firm Stephenson Harwood noted in a 2016 guest commentary on managing conflicts in GP-led deals.
But rather than dismiss the VSS case as simply a case of alleged Wall Street skulduggery, the secondaries industry should take this as welcome guidance from an enforcement body that has been unnervingly silent over best practice in GP-led deals. With no standardized approach as to how to treat conflicts of interests in such transactions, some parts of the industry have been left to their own devices.
Will more concrete guidance be forthcoming? Certainly the Institutional Limited Partners Association has, at the behest of its members, spent some time on GP-leds and is evaluating risks associated with such deals. ILPA is working on guidelines on the subject as part of its private equity principles and is expected to issue these as soon as later this year.
Secondaries has come a long way in a relatively short period of time, but remains a relatively small corner of private markets. Better that kinks are ironed out now and lessons learned early than when annual deal volume is measured in the hundreds of billions and GP-led restructurings become a regular exercise for the brand-name global GPs.