Asia-focused growth capital firm New Silk Route Advisors has been fined an undisclosed amount and censured by the Securities and Exchange Commission for failure to get advisory board approval for co-investments.
“NSR's co-founder and CEO is also a co-founder and CEO of a different, Commission-registered investment advisor to other private equity funds,” an SEC filing said. “From approximately 2008 to 2014 the NSR funds invested over $250 million in four portfolio companies in which another private equity fund managed by the advisor also invested.”
This contravened the limited partnership agreement, which stated the LP advisory board must give approval for any such co-investments.
In most cases the funds invested pro rata, but at least one investment resulted in dilution for the related funds. When ultimately presented, the advisory board declined to ratify the co-investment transactions.
The investments were made by New Silk Route PE Asia Fund and New Silk Route PE Asia Fund-A. They seek buyout opportunities predominantly in Indian telecoms, engineering and financial services companies. One-third of capital is reserved for investment in other south Asian countries.
“The SEC is using the LPA as an enforcement tool. The violation of the LPA becomes re-characterised as a breach of fiduciary duty and failure to disclose. Presumably, the limited partners had a private claim for violations of the LPA, although the SEC does not indicate that they ever took such action,” Cipperman Compliance Services said.