For the most part, the agenda at this year’s PEI Investor Relations Forum was what you would expect: an expert panel on crisis management, another on the current rules of the fundraising game, a topical roundtable on private equity’s relations with the media. But near the end of Day One, there was something you normally wouldn’t see: a one-on-one on-stage conversation between SEC private equity specialist Igor Rozenblit and pfm’s very own Nicholas Donato.
What was a regulator doing at an event dedicated to IR pros? From what we can gather, the commission wants to make IR staff just as much an ally for private fund compliance as the Chief Compliance Officer. During the onstage interview, Rozenblit reminded IR specialists that they are just as subject to the anti-fraud provisions of federal securities laws as anyone else. Here are some important takeaways from the conversation that every member of the firm should keep cautious of:
Co-investments: The co-investment offering process has been top-of-mind for IR professionals since Rozenblit’s boss Marc Wyatt called out the strategy at our Private Fund Compliance Forum in May. Rozenblit said the commission’s stance on the practice was “flexible”; the SEC was not expecting managers to adopt a pro-rata approach to sharing co-investment opportunities with their investors. GPs can offer all co-invest to only one LP if they so choose, as long as all the other LPs in the fund are aware from the start that not everyone is getting the same treatment.
LPA knowledge: IR professionals should know the product they’re selling, Rozenblit said, and know that if a material fact or practice is not disclosed to investors, it could be a violation of the law. In many cases, it may be easier for an IR team member to explain a practice to an LP and obtain consent ahead of time rather than trying to justify the manager’s decision after the fact. An important warning: the SEC may reach out to investors if they detect a practice that they suspect is material and has not been disclosed. Investors might be less forgiving if they become aware of something by hearing about it from the SEC.
IR in exams: The IR team might get caught up in the exam process in one of two scenarios. If marketing is one of the focus areas for the examination, then the IR team will likely be interviewed during the inspection. IR may also be indirectly involved if SEC examiners contact investors and the IR team has to handle inquiries from LPs about the exam. While there is some personal liability for IR professionals, it should not be the only reason that IR pays attention to compliance and disclosures. Smooth and uneventful examinations benefit everybody, Rozenblit noted. “The better an exam goes, the less questions you might get later.”
Stapled secondaries: With pre-crisis vintage funds now restructuring more often than they used to, stapled secondaries transactions are becoming more popular. However, the importance of a successful restructuring to the GP, the stress involved in the negotiation and the inherent conflicts of interest these transactions have make them risky from a regulatory standpoint. According to Rozenblit, it could be very easy and tempting to move the deal forward by making statements that are not 100 percent true. Even statements such as “Everyone has already signed up to the deal but you” could be material, and if they’re not true could create legal exposure for the IR professional and the GP, Rozenblit warned.
Track record marketing: The regulator received more questions on track record presentation than any other topic during the session. While examiners are cognizant that case studies have been a part of private equity fundraising for a long time, the key is to make it very clear to the reader that they are only a small select sample of transactions, noted Rozenblit, and also to present the full track record clearly and fairly. When it comes to websites, presenting information about the manager and its business – including which portfolio companies they have invested in historically – is fine, but information about specific funds, returns and fund terms could be construed as an offering. And when presenting a select track record based on a changed investment strategy, the general rule is to ensure that the presentation is not misleading. To be on safe ground procedurally, the manager might consider presenting both the “select” and “full” track record together, Rozenblit suggested.
In all these areas, Rozenblit gave the crowd plenty to mull over. But most importantly, he solidified one fact: compliance is no longer a priority area for CCOs alone. IR pros, welcome to the world of the SEC.