Fenway would be a big trophy for SEC

However, subsequent conversations with industry sources gave me a different perspective. While a case against Fenway would not be the same as bringing charges against one of the mega-powers in the industry, it would still be the biggest name in the SEC’s trophy case.

A case against Fenway could be seen as an indictment of LPs’ ability to police their GPs.

Keep in mind, this is all speculation because a Wells Notice does not ensure prosecution against the recipient. Instead, it gives the recipient time to challenge and answer allegations made by regulators.

I don’t know the specific charges the SEC has made against Fenway. Three sources I spoke with said issues the SEC is looking into include payments made by portfolio companies to Fenway Consulting Partners LLC, how the firm has handled disclosing to limited partners information related to fund financial statements, and a GP clawback. 

Spokespeople for Fenway and the SEC declined to comment.

Fenway Partners was a hot firm in the 1990s and early 2000s. It quickly scaled up with $527 million for its debut fund in 1996 and more than $900 million for its second fund in 1998. This was an era when firms could quickly jump fund size and grow along with the bull market.

Fenway achieved institutional-level support, something most young firms hope to achieve as they grow. But the firm’s performance has been less than stellar.

Fenway’s first fund generated a 1.01x multiple and a 0.30 percent internal rate of return as of June 30, 2014, according to alternative assets data provider Bison. Fund II, a $909 million fund raised in 1998, produced a 1.25x total value multiple and 5.3 percent IRR as of June 30, 2014, according to the Oregon Public Employees Retirement Fund. Meanwhile, Fund III, which raised about $700 million in 2006, produced a 1.02x total value multiple and a 0.30 percent IRR as of last June, Oregon reported.

Fenway has commitments from some of the biggest limited partners in the game, including Oregon, the California Public Employees Retirement System and the New York City Retirement System.

And yet it was the SEC, not the LPs, that has cited potential problems at Fenway. LPs have had a tough time policing GPs because of the secretive nature of this asset class and because LPs agree to opaqueness and passivity. 

It’s always been my contention that LPs are sophisticated investors who don’t need to be watched over by the government as if they were helpless children at the mercy of the “wolves” of private equity. 

Now I’m not so sure. If the SEC ends up punishing Fenway for behaviors that weren’t caught or were ignored by sophisticated investors and their lawyers, then I may have to rethink my position. Maybe the industry does need a higher authority to keep an eye on GPs.