By Andrew M. Walsh
Attorney, Anderson Kill
“Given the type of information we’re finding on PE funds, PE funds of funds might be in for a rude awakening as large investors discover that some have a different standard of due diligence than their hedge fund counterparts.”
In Q1, the firm initiated four times as many reports on PE funds for various clients as it had in Q1 of 2014.
BackTrack, which for years has specialized in conducting background checks on hedge fund managers for institutional investors, began seeing an increase in interest from clients towards the end of 2014 and this swelled beginning in January 2015.
“We usually investigated PE funds for clients on a one-off basis,” said BackTrack executive vice president Randy Shain. “Now many of these same clients are coming to us with multiple requests a month.”
The results have been striking as well. In 83 percent of the investigations, BackTrack found litigation naming either the fund or the individual subjects. The litigation has included discrimination suits, a lawsuit by a former employer seeking $10 million, a suit regarding a fund’s portfolio company's IPO for allegedly issuing "materially false and misleading statements” and multiple allegations of “securities fraud.”
“PE firms generate a lot of information, whether it’s news about their portfolio companies or litigation involving its own employees,” Shain said. “Investors need to be aware of everything that’s going on before they commit to these long lockups.”
Despite seeing an increase from its clients, Shain said more traditional PE fund of funds have been somewhat reluctant to follow along. While many of these firms conduct some due diligence, it is often much more limited in scope than BackTrack’s investigations. He added that PE fund of funds could find themselves facing competition as others enter the private equity space.
“Many large investors are starting to see that this type of background due diligence is the norm,” Shain said. “Given the type of information we’re finding on PE funds, PE funds of funds might be in for a rude awakening as large investors discover that some have a different standard of due diligence than their hedge fund counterparts.”