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SEC Charges Private Equity Adviser for Undisclosed Disproportionate Allocation of Transaction Expenses to Advised Fund

On June 14, 2022, the US Securities and Exchange Commission (SEC) released an order charging private equity adviser Energy Capital Partners Management, LP (ECP) with Investment Advisers Act violations in connection with a 2018 take-private transaction.
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The charges stemmed from SEC findings that ECP did not disclose the disproportionate allocation of transaction expenses to one of its advised funds and had not implemented written policies to prevent the violations from occurring.

The 2018 take-private transaction was initially financed by an ECP fund, a consortium of third-party investors, and a credit facility to bridge the equity gap until closing. After acquiring the remaining equity needed to close from a newly launched ECP fund and a second consortium of investors, the initial third-party investors refused to accept any portion of the bridge loan fees. In response, ECP allocated the fees to the two funds and the second consortium of investors but failed to disclose the disproportionate allocation to one of the funds.

ECP settled with the SEC without admitting to or denying the SEC’s findings, agreeing to pay a $1 million penalty and voluntarily paying back more than $3.3 million to limited partners of the impacted fund.

Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated the settlement “reaffirm[s] the SEC’s commitment to focus on misconduct in the private fund space, including that involving co-investor issues.”

The SEC’s advice following the settlement: “Private equity fund advisers must follow their own agreements and ensure that investors do not pay more in fees or expenses than they bargained for[.]”

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