When buyout firm HM Capital Partners, the successor of Hicks Muse Tate & Furst, registered with the US Securities and Exchange Commission – as required by the Dodd-Frank Act – the document revealed that in 2004 it was fined $5,000 for providing “things of economic value” to employees of the Teachers’ Retirement System of Louisiana.
The fine, which stemmed from incidents in 2002 before HM Capital spun out of Hicks Muse, happened well before the national pension pay-to-play scandal that erupted in New York in 2009 – which eventually sucked in various private equity managers, at least three major limited partners and led to prison time for some of the individuals implicated.
By contrast, the HM Capital case was wrapped up quietly and didn’t garner much attention; the only record of it was in the minutes of a meeting of the Louisiana pension’s ethics committee. So it’s quite possible that LPs who have since made a commitment to HM Capital may never have known that the firm was once fined for giving gifts to public officials.
As such, the mandate that private equity firms register with SEC (as part of an effort to increase transparency) can potentially be of huge benefit for industry LPs. The registration documents, many of which have come online only in past months, include masses of detailed information, including disciplinary history.
Disclosure requirements, including those related to disciplinary measures, are nothing new as far as the SEC is concerned; companies in other sectors regulated by the SEC have long been forced to do it. But now that registration is compulsory for the larger private equity firms, most will be providing details like these for the first time. Better still, they’ll all be in one place.
These disclosures, especially the disciplinary history, are already becoming another way for LPs to perform more rigorous due diligence. Several LPs have told me that they plan to read up on their own managers, as well as any potential new relationships.
It will involve trawling through all the relevant documents, but that’s not particularly demanding. Over a two day period in April our New York office reviewed filings for more than 20 firms, including mega-funds like Kohlberg Kravis Roberts, TPG Capital and The Carlyle Group, as well as smaller firms like Castle Harlan, Willis Stein and The Riverside Company and Sun Capital Partners.
Although most of the firms had nothing to report in terms of disciplinary history (which can include either civil or criminal actions taken against the firm itself or individual employees, excluding support staff), there were some notable exceptions.
Providence Equity Partners, for example, disclosed that one of its senior analysts was arrested and charged with felony assault in 2001, well before the employee had joined the firm (the charge was reduced to a misdemeanour; the analyst served a year of probation and paid a $62 fine).
Including this type of information might seem to go well beyond the level of detail that an LP requires when researching a firm. However, one head of private equity at an endowment told me that the inclusion of this kind of incident gives comfort that the firm is being absolutely thorough in making sure that it is complying with the rules.
Equally, it’s comforting for LPs to know that senior members came out clean. Whereas a criminal charge for a mid-level employee would have “zero impact” on a decision to commit to a particular firm, a similar charge against a senior-level executive would cause hesitation because it goes to “judgment and integrity”, the LP told me.
And in some cases, filings will be of great interest to LPs. For instance, Huntsman Gay Global Capital disclosed that its chief financial officer, Gary Crittenden, was fined by the SEC in 2010 for including misleading statements about Citi’s exposure to subprime debt during his time as the bank’s CFO. That’s particularly interesting since Crittenden is reportedly taking over the chief executive officer role at Huntsman Gay when Robert Gay steps down to serve in a senior role within the Mormon church.
It’s up to LPs to decide how to use this information. But the salient point is that they now have easy access to it, which will help them make more informed decisions about who to add into their portfolios. That can only be a good thing.