On Thursday, The Wall Street Journal published an article on conflicts between the top executives of some private equity firms and their personal investments: “Fund Kings Open Family Offices.”
The article focused on two aspects of the executives’ wealth management: (1) distractions from activities outside the funds and (2) conflicting investments with the funds.
On the distraction issue, the article provided conflicting views from investors. One view is that executives should have all of their own money in the firms’ funds. The other view is the more pragmatic approach that diversification makes sense as long as the outside investments are not a distraction. Primarily, the concern is that the fund is the primary beneficiary of investment ideas and the executives’ time.
The second issue comes from those “distractions.” Personal investments may intersect with the fund investments. The article identifies instances where there was an overlap and a potential conflict. The article mentions the use of “family offices” by some fund executives. Some of these family offices also invest in private equity and other opportunities that may be opportunities that also interest the fund.
I think the article is a compilation of “headline risk.” There are no wrongdoings outlined in the article. There is just the appearance of conflicts.
The private equity firms require the investments of executives to be run through compliance and a conflicts review process. I have little doubt that big private equity firms that Blackstone, Apollo and TPG would have thoughtful review processes to make sure that the potential conflicts are resolved in a way that protects the funds.
The conflict review process is internal and the transaction is private so there is little disclosure made available to the public or to reporters that may be interested. That leaves the firms open to this type of headline risk.
The more high profile the outside investments, the greater media scrutiny they attract and the greater the headline risk.
One of the Fortress Investment Group executives bought a professional sports team, one of the most high profile investments you can make.