SEC inspectors: Co-investments need to be disclosed

Investors need to be told upfront about the firm’s process for co-investments, said US Securities and Exchange Commission staff who are part of a recently assembled inspections unit dedicated to private funds. Moreover registered advisors need to keep robust documentation on their co-investment policies and who they are offered to.

Whatever the co-investment policy is, GPs then need to ensure their own internal guidelines are subsequently met, stressed Igor Rozenblit and Marc Wyatt, co-chairs of the new inspections unit, who were speaking on a webinar Wednesday hosted by the Association for Corporate Growth.

“Offering [co-investments] to investors is becoming a marketing tool that advisors are using,” said Wyatt, adding that the commission wants to know whether GPs “have the policies and procedures in place to ensure that you are showing these co-investment opportunities to the full gamut of potential investors.”

Rozenblit added that GPs obviously don’t have to offer co-investments to every LP, but stressed that all investors should be aware of the criteria of co-investment allocation before committing their cash.

He also said investors should be told about when co-investments happen. “It doesn’t have to be before the co-investment happens or immediately after but in some reasonable time period that would enable investors who think they ought to be getting co-investments to call their manager and advocate themselves.”

The SEC’s focus on co-investments was a popular talking point at this week’s PEI 2014 Private Fund Compliance Forum in New York. Delegates at the conference said co-investment policies were receiving scrutiny during presence exams. One industry CCO in attendance mentioned that her firm now documents why certain LPs are offered co-investment opportunities ahead of others to meet SEC expectations.

“We can point to side-letters that showed certain LPs are only interested in certain industries, or that some LPs could only come on board if they had enough of a time window.”

A second CCO in attendance added that these documents help the deal team remember why certain LPs were selected over others during a co-investment opportunity. “It can be hard to recreate the facts during a stressful presence exam.”