GP allows third party oversight of finances

In a rare move, Freeman Spogli & Company will allow investors in its latest fund, FS Equity Partners VII, to hire an independent adviser in order to monitor the fund’s financial records and scrutinize the fund’s governance practices for conflicts of interest, according to the The New York Times. The firm did not respond to requests for comment from pfm. 

 

The decision was reportedly made by Freeman Spogli in response to a presence exam by the US Securities and Exchange Commission (SEC) in April 2013. Following the exam, SEC officials said that Freeman Spogli appeared to be violating fee-sharing arrangements with investors in two prior funds.

 

The firm was also collecting fees from transactions without registering as a broker-dealer, according to a letter from the SEC obtained by the Times. In early 2013, some SEC officials began openly questioning if private equity professionals paid a commission for M&A advisory work should have to register as broker-dealers. Since then, the issue has died down, with some speculating the SEC will issue an exemption for the industry sometime later this year. 

 

While allowing investors to hire an independent adviser is uncommon in the private equity world, the Freeman Spogli decision parallels the way that some real estate funds use third-party advisers to introduce an objective perspective. Such firms as Bentall Kennedy and CBRE Global Investors use independent advisory board members to weigh in on investment decisions.

 

Investors in Fund VII, which closed in October on $1.3 billion in equity, include the New York State Common Retirement Fund, the New Jersey Division of Investment and the New Mexico State Investment Council, according data from the PEI Research & Analytics team.