A larger-than-life advisor credited with single-handedly elevating the reputation of private capital markets may have just compromised the entire sector’s reputation with investors.
Lynn Tilton and her firm, Patriarch Partners, has been collecting a boatload of fees while allegedly deceiving investors in three funds may have just set back private equity markets.
The SEC announced Monday that it has charged the investment advisor and the firm with fraud accusing them of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds under their management.
For those of you that don’t know the name “Lynn Tilton,” she’s won star billing south of the border for rescuing companies in distress using her over-the-top personality to charm clients and would-be acquisitions, alike. In 2011 New York magazine profiled Tilton including a picture with her lying on a chair wearing nothing but a fur coat.
Tilton’s firm is said to be invested in 75 companies with revenues totaling more than $8 billion. In addition to the term “turnaround queen,” Tilton is often referred to as the “Diva of Distressed.” She’s the ultimate self-promoter.
So, what has the SEC alleging these serious charges?
“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.
“Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them.”
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What does this mean for investors?
It’s not good.
Essentially, the SEC say Tilton and her firm haven’t followed the valuation methodology set out in the offering documents for the three funds, opting instead to provide their own subjective valuations, which put the value of the assets in those funds at a much higher level entitling them to significantly higher fees – $200 million worth according to the regulator.
These three CLO funds, collectively referred to as the Zohar funds, raised $2.5 billion from investors between 2003 and 2007 during the heyday of CLOs. In 2011, Forbes questioned the quality of these CLOs suggesting the assets were the equivalent of junk status.
Three years later and it appears Tilton’s troubles have come home to roost.
The question for advisors is whether this particularly egregious case of alleged misrepresentation is a reflection of private equity investments in general or simply something specific to Tilton and her firm and not a common occurrence in the industry.
The answer surely will be determined at some point in the future.
The SEC announced Monday that it has charged the investment advisor and the firm with fraud accusing them of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds under their management.
For those of you that don’t know the name “Lynn Tilton,” she’s won star billing south of the border for rescuing companies in distress using her over-the-top personality to charm clients and would-be acquisitions, alike. In 2011 New York magazine profiled Tilton including a picture with her lying on a chair wearing nothing but a fur coat.
Tilton’s firm is said to be invested in 75 companies with revenues totaling more than $8 billion. In addition to the term “turnaround queen,” Tilton is often referred to as the “Diva of Distressed.” She’s the ultimate self-promoter.
So, what has the SEC alleging these serious charges?
“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.
“Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them.”
#pb#
What does this mean for investors?
It’s not good.
Essentially, the SEC say Tilton and her firm haven’t followed the valuation methodology set out in the offering documents for the three funds, opting instead to provide their own subjective valuations, which put the value of the assets in those funds at a much higher level entitling them to significantly higher fees – $200 million worth according to the regulator.
These three CLO funds, collectively referred to as the Zohar funds, raised $2.5 billion from investors between 2003 and 2007 during the heyday of CLOs. In 2011, Forbes questioned the quality of these CLOs suggesting the assets were the equivalent of junk status.
Three years later and it appears Tilton’s troubles have come home to roost.
The question for advisors is whether this particularly egregious case of alleged misrepresentation is a reflection of private equity investments in general or simply something specific to Tilton and her firm and not a common occurrence in the industry.
The answer surely will be determined at some point in the future.
