Lessons for PE Managers from the SEC’s Ongoing Scrutiny of Private Equity Funds

Private Equity Strategies – Abraaj Group Launches Energy Investment Arm by Opalesque

Abraaj Group Launches Energy Investment Arm

by Bailey McCann, Private Equity Strategies

The Abraaj Group, an investor operating in global growth markets, is creating a new project development arm to further extend its investment capabilities energy infrastructure space. The group will focus on finding and developing energy assets in developing economies throughout the world.

The move may seem counterintuitive but, the firm says they are looking to the future of energy as well as new energy markets worldwide.

“Abraaj’s ambition is to effectively manage capital across a number of energy subsectors,” Sev Vettivetpillai, Partner and Global Head of Abraaj’s Thematic Fund Business tells Private Equity Strategies. “We will be looking specifically at renewable energy sources including geothermal, wind and solar.”

The firm has already started making investments in this theme and Vettivetpillai says they have been able to find suitable assets while still avoiding the commodities rout which is impacting petrostates. In October of last year, Abraaj announced a partnership with the Aditya Birla Group to build a gigawatt scale renewable energy platform focused on developing solar power plants in India.

In addition to renewables, the group will also be considering midstream and downstream opportunities in distribution, management and storage. “We aren’t interested in taking commodity risk,” Vettivetpillai says.

According to Vettivetpillai, there is a pent-up demand in emerging markets for viable energy delivery, however, many of these projects require greenfields style development which can make it difficult for private equity or other would-be investors. He adds that even when projects get to a possible financial close, often the way energy developers structure transactions can make it difficult to satisfy both debt and equity investors. To that end, Abraaj plans to get involved early on by working with partner firm Themis to lead or partner with other project developers in order to bring projects from concept to bankability.

Abraaj acquired Themis in 2013 to support this new energy investment theme. The company has energy infrastructure projects under development in excess of 1,300 megawatts and has advised several African governments and lending institutions on energy and civil infrastructure related projects.

Tas Anvaripour will join Abraaj as a Partner in the energy infrastructure team, following her previous roles as Chief Executive Officer of Africa 50 and Chairperson of Themis. Marc Mandaba, Founder of Themis and former private infrastructure investment officer at the African Development Bank, will join Abraaj as Managing Director and Head of Themis.

Vettivetpillai says the bulk of the investment projects Abraaj will be pursuing will be in Africa. “There are opportunities all over the world that we will look at, but Africa has significant infrastructure demands and we have the expertise on the team,” he adds.

In total, the energy investment thematic group has a staff of 14, but may expand over time.

According to Vettivetpillai, Abraaj plans to break up the traditional investment holding company model in order to offer investment opportunities throughout the process including development, financial close, and at the yieldco stage. “We have found that there are different groups of investors who are interested in different phases of each project, so we want to provide those options,” he said.

Regs Watch: Lessons for PE Managers from the SEC’s Ongoing Scrutiny of Private Equity Funds

by Carl A. de Brito, David A. Vaughan, James E.B. Bobseine, and Gary E. Brooks – Dechert LLP

A large number of private equity managers were required to register for the first time with the U.S. Securities and Exchange Commission (SEC) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). Since the Act’s enactment in 2010, there has been a significant increase in SEC scrutiny of private equity managers – primarily through investigations and civil enforcement actions initiated by the SEC’s Division of Enforcement, as well as the Presence Examination Initiative (Initiative) conducted by the Office of Compliance Inspections and Examinations (OCIE). The SEC’s enforcement activities in this area accelerated in 2014 and 2015. Given the scope of the deficiencies cited by the SEC Staff following the Initiative, it seems clear that the bar has  been raised in this area.

Private equity managers seeking to comply with their regulatory obligations can learn from the activities of OCIE and the Enforcement Division. Specifically, private equity fund fees and expenses have come under substantial regulatory scrutiny as the SEC Staff has observed what it believes are allegedly improper practices regarding (i) the level of disclosure with respect to such fees and expenses; and (ii) whether such fees and expenses are being fairly allocated among fund managers, funds, and other parallel investment vehicles and investors, as well as co-investors. And, an important take-away from recent enforcement actions is the possibility that the SEC may find that full and fair disclosure can cure, or at least mitigate, otherwise problematic fee and expense practices.

Background and Legal Framework

Prior to the enactment of the Act, many advisers to private funds were exempt from SEC registration as investment advisers pursuant to former Section 203(b)(3) of the Investment Advisers Act of 1940 (Advisers Act). Title IV of the Act eliminated the exemption previously provided by Section 203(b)(3) – as a result, many previously unregistered advisers to private funds were required to register with the SEC and became subject to its regulatory oversight.

The Presence Examination Initiative – instituted in 2012 and involving examination of more than 150 private equity firms – was meant to provide the SEC with a better understanding of the unique issues and risks surrounding the newly-registered advisers to private funds. Through the Initiative, OCIE has identified several “key risk areas,” including improper expenses, hidden fees, issues in the marketing and valuation of private equity funds and co-investment policies and practices. SEC enforcement actions in 2014 and 2015 have made clear that the Enforcement Division is following through on OCIE’s identification of risk areas by targeting what it views as “improper expenses” and “hidden fees.” During the last year, the Enforcement Division has continued to publicly state that it intends to bring enforcement actions against private equity firms, and that those actions will relate to “undisclosed and misallocated fees and expenses as well as conflicts of interest.”{1}

Unlike the regulation of registered investment companies, the federal securities laws do not substantively regulate the fees and expenses charged by private fund advisers, with the exception of restrictions on charging carried interest to investors who do not meet certain high net worth tests.{2} However, the U.S. Supreme Court has interpreted Section 206 of the Advisers Act to impose a fiduciary duty on investment advisers,{3} and by rule, investment advisers to private funds must make full and fair disclosure to investors and prospective investors. 4 As such, investment advisers have a duty to eliminate – or, at a minimum, disclose – conflicts of interest. This legal framework means that, theoretically, a private equity manager registered as an investment adviser could charge any fee or expense to a fund (if investors agreed), so long as this is clearly and adequately disclosed to investors. As a corollary, when an adviser exercises discretion in the absence of disclosure, the adviser risks the Staff applying its own standards of whether this result was “fair.” Recent activities of the Enforcement Division and OCIE highlight this.

Division of Enforcement