I have seen a few indications from the Securities and Exchange Commission showing that examiners are concerned about co-investments. I have yet to see a large over-arching activity in the industry that has been identified as problematic. I saw an action last week for a fund advisor related to co-investments so it caught my eye. Upon closer inspection, the issue was less one of co-investments and more one of an affiliate transaction.
New Silk Route Advisors is registered as an investment advisor. It manages two private equity funds that primarily invest in India. those funds invested in four companies along side another unnamed fund.
That unnamed fund was managed by a separate registered investment advisor. That advisor was run and co-founded by the same person who ran and co-founded New Silk Route Advisors.
The SEC claims that the fund documents for the New Silk Road funds treated that unnamed fund as an affiliate and therefore the co-investments were affiliate transactions. According to the fund documents, New Silk Road should have disclosed the co-investments to the fund boards of advisors and obtained approval.
The misstep resulted in a fine of $275,000.
The charge does cite any specific harm to investors in the New Silk Route funds. It does note that the unnamed fund ran out of capital and was not able to make a follow up investment in one company. New Silk Route stepped in and contributed the additional capital and took a bigger chunk of the company. At the time of the unnamed fund’s dilution, New Silk Route sought the board of advisors approval for the co-investments.
Adding in a related party does create many concerns, especially if the funds have different timelines and different investment styles. It was sloppy to not treat this an affiliate transaction and seek approval.
According to my tally, these are the cases that the SEC has publicized on co-investment problems:
- New Silk Road – failing to treat a co-investment with an affiliate as an affiliate transaction
- Co-investment allocation – No cases, but concerns about luring investors with co-investments and not making them available.
- Improper allocation of broken deal costs with co-investments – KKR
Let me know if you aware of others.
Sources: