Private Equity funds face significant liabilities as they attempt to meet sophisticated investor expectations and increased regulatory scrutiny. Golsan Scruggs understands these challenges and delivers tailored insurance solutions to protect fund managers.
THE BASIS OF RISK (General Partner Liability: GPL)
Limited Partners frequently pursue litigation against the fund manager and adviser following periods of underperformance, seeking to recover perceived losses. Because poor performance alone is rarely actionable, investors often reframe claims through allegations of misrepresentation, inadequate disclosure, negligence, breach of contract, and breach of fiduciary duty. Three main areas of attack are as follows:
- Investors may allege that the prospectus for investors contained material inaccuracies. For example, investors might allege that the prospectus did not adequately disclose the risks associated with the investment strategy or contained inaccurate statements about historical performance.
- Investors may allege that the poor performance resulted from negligence. The investor might argue that the private fund did not execute on its proposed strategy, that the strategy deviated from the initial mandate, or that it did not effectively manage the fund portfolio.
- Investors in a private fund may allege that the investment adviser engaged in improper conduct to maximize the adviser’s interests at the expense of investors. A common set of allegations involves performance fees for non-liquid assets. If an investment adviser is receiving fees based on both assets under management and performance, it may have an incentive to overvalue fund assets or avoid a write-down of poorly performing assets.
General Partner liability is not solely driven by limited partners in their funds. The three primary forces of risk outside of LPs are: regulators, business partners, and portfolio companies.
- SEC-registered managers face heightened scrutiny from the Securities and Exchange Commission on a variety of topics, including but not limited to undisclosed or under-disclosed conflicts of interest, improper securities practices, and performance fee calculations.
- Minority shareholder disputes (typically a minority stakeholder or LP) arise from governance failures, control issues, valuation judgements, or unfair treatment in the allocation across different investment opportunities, fees, fund expenses, or co-investment rights.
- Other Non-LP Risks, such as JV Counterparties, lenders, or portfolio companies, can also generate claims by contractual disputes, control issues, or alleging poor management.
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