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Caspersen case not an indictment of wider restructuring business

  • Sources say Caspersen case won’t affect broader restructuring business
  • Restructurings represent more volume on secondary market
  • SEC scrutinizes restructurings, zombie funds

The arrest and charging of former Park Hill Group executive Andrew Caspersen for an alleged scheme related to a private-equity-fund restructuring is not a sign of broader deficiencies in this growing part of the secondaries market, sources said.

Instead, the situation was a one-off event and not an indictment of the wider business of restructuring aging private-equity funds, according to three sources who spoke with Buyouts this week.

Caspersen’s alleged scheme used the name of a large restructuring process in the market last year: Irving Place Capital Partners III. Park Hill ran the process, in which Coller Capital led an investor group that bought out existing Fund III LPs and kicked in fresh capital for new investments.

Caspersen is alleged to have created a shell entity using Irving Place’s name into which he wanted to raise $95 million. He allegedly got $25 million out of the Moore Charitable Foundation and used the bulk of it to make options trades.

He also allegedly solicited another potential investor for $50 million but never got the money, according to a complaint filed by the U.S. Department of Justice.

To be clear, the charges don’t relate to the Irving Place restructuring deal.

The situation is unfortunate for the secondaries market and the growing business of dealing with aging private-equity funds, sources said. It “makes secondaries look bad,” one secondary-market source said.

Restructurings have come under the scrutiny of the Securities and Exchange Commission in recent years. The agency is focused on making sure that existing LPs are not forced into “two bad options,” Igor Rozenblit, co-head of the private-funds unit in the SEC’s Office of Compliance Inspections and Examinations, said at a conference last year.

In February, Rozenblit told the audience at Private Equity International’s CFO and COOs Forum that the SEC was watching so-called zombie funds, aging funds with managers who aren’t likely to raise new money. These are the types of funds ripe for restructuring.

Zombie funds “may be tempted to resort to creative approaches in markets that are less favorable,” Rozenblit said, according to PEI.

In October, Mary Jo White, chairwoman of the SEC, said the agency was creating guidelines to help firms wind down funds, Dow Jones reported, based on a transcript of the speech White gave at the Managed Funds Association conference.

Restructurings have become an important way for the industry to deal with aging funds, helping LPs exit funds to which they want to end their exposure, and giving GPs more time and capital to wind down those funds and make new investments.

It’s a creative market solution to a growing problem: how to fairly end private-equity funds.

It’s been interesting to watch the industry not only come up with a way to deal with aging PE funds, but also to tweak this process to make it as fair as possible to all players. What started out as “the Wild West” a few years ago, one secondary source said, has become increasingly streamlined and, importantly, gives LPs the chance to have their voice as part of the process.

The trend now is to provide a “third option” in restructurings, in which existing LPs who don’t want to sell can stay in a fund on the same terms they’ve always had. The only change would be to lengthen the fund term, giving the GP more time to exit investments out of the old fund.

Coincidentally, the Irving Place restructuring was seen by some secondary-market sources and LPs as anachronistic in that it forced LPs who wanted to stay with the GP to put up fresh capital for new investments. LPs have pressured the industry to move away from requiring existing LPs to put up new money, sources said.

Action Item: Check out the DOJ complaint here: http://1.usa.gov/1pL4awD

Photo of U.S. Attorney Preet Bharara courtesy Reuters/Shannon Stapleton