Lessons from the Caspersen case

The arrest and charge of Andrew Caspersen – a former managing director at advisory firm Park Hill, and before that a principal at Coller Capital – in March for allegedly attempting to defraud two institutional investors of more than $95 million, has sent shockwaves through the financial services and private equity secondaries communities.

“This is bad for the financial services industry as a whole, and I don’t like it that it happens to be someone from our sector,” one source at a secondaries advisory firm says.

Park Hill has said it started an internal investigation immediately upon learning about the suggested improper behaviour and swiftly notified the Manhattan US Attorney’s Office.

Caspersen, who joined Park Hill in 2013, allegedly created a fake credit facility to support a real stapled secondaries transaction, according to the US Department of Justice’s complaint.

But industry participants have been divided over the role of the secondaries market in the case, with some pointing out the alleged wrongdoings had little connection to secondaries and private equity practices generally.

Should the allegations prove to be true, one source says, “it could have been in any sector”.

Others say it is hard to ignore the DOJ’s complaint that the Coller veteran, who joined Park Hill when it was part of Blackstone and was known to lead large, complex fund restructurings, allegedly used the guise of a restructuring deal and his connections to carry out the alleged fraud attempts.

Igor Rozenblit, co-head of the private funds unit at the US Securities and Exchange Commission, told delegates at a seminar in late April that an alleged incident such as this was more likely to happen in the secondaries market than elsewhere: “Many people say, 'This guy is a bad guy, he would’ve done it in any other context, it’s not a restructuring issue.’ But these transactions are complicated and opaque.”

Anne Beaumont, a lawyer who works on financial services litigation at Friedman Kaplan Seiler & Adelman in New York, says: “People see a nice, steady large return, and they hate to ask questions too hard because then they’re put in a position where they might need to pull their money or not invest. There’s a psychological component to people not wanting to question a good thing.”

While Beaumont says fraud happens in any industry, she notes it was a wake-up call for investors in private equity, which is not subject to the tighter regulatory framework seen by hedge funds, for example.

The impact of the Caspersen case is unlikely to affect the number of restructuring deals or LPs’ attitudes toward them. It is a growing area of the market, with GP-led restructurings accounting for about 25 percent of the $40 billion secondaries market in 2015, up from 20 percent a year earlier, according to sources.

Advisors are increasingly using innovative and complex ways to get a piece of the action, particularly as funds raised at the peak of the last cycle come to the end of their lives.

There is room in private equity for a more formal approach to due diligence, says Beaumont: “Institutional investors in the hedge fund space have no problem being incredibly aggressive with managers and pushing them hard to get satisfactory answers. The private equity space is going to have to learn to do that in a polite and thoughtful way.”