Type: Client Alerts
On September 21, 2017, the SEC announced that it had settled an enforcement proceeding against a private equity fund manager alleging that the manager’s private equity funds were inappropriately allocated, and charged broken-deal expenses attributable to affiliated co-investors.
According to the SEC’s order, from 2004 to 2015, the three main private equity funds of the fund manager (the “PE Funds”) invested in 85 companies, and several co-investors participated in these investments. During this time, the PE Funds incurred expenses attributable to investments that did not proceed to completion. Such expenses are typically defined in the fund documents as “Broken-Deal Expenses” or “Abort Costs.” While the co-investors participated in the fund’s successful transactions and benefited from sourcing of investments (and were allocated proportionate expenses), the fund manager did not allocate any of the broken-deal expenses to the co-investors.