Fenway Partners Fined $10M for Conflicts of Interest

Fenway Partners and four of its executives have agreed to pay $10 million to settle federal charges of failing to disclose potential conflicts of interest.

An investigation by the US Securities and Exchange Commission (SEC) found that Fenway, principals Peter Lamm and William Gregory Stuart, former principal Timothy Mayhew Jr, and chief financial officer Walter Wiacek “weren’t fully forthcoming” over payments of more than $20 million to Fenway employees and an affiliated consulting entity.

The private equity group counts several of the biggest US pensions among its clients, including the California Public Employees’ Retirement System (CalPERS), Oregon Public Employees Retirement Fund (OPERF), and New York City Retirement Systems.

“Fenway Partners and its principals breached their fiduciary obligation to fully and fairly disclose conflicted arrangements to a fund client, and compounded the breach by omitting material facts about the arrangements when communicating with fund investors,” said Marshall Sprung, co-chief of the SEC Enforcement Division’s asset management unit.

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According to the SEC, Fenway Partners and its principals failed to tell a client of its Fenway Capital Partners Fund III that they had rerouted $5.74 million in fees to the firm’s affiliate, Fenway Consulting Partners. The SEC further charged that they avoided providing the benefits of those fees to the client in the form of management fee offsets.

Additionally, the SEC reported Mayhew and two former Fenway employees received $15 million in compensation from the sale of a portfolio company for services that they had “almost entirely” provided when they were Fenway Partners employees. These payments were not disclosed as related-party transactions in financial statements provided to investors.

Fenway Partners neither confirmed nor denied the SEC’s charges.

A spokesperson from Fenway Partners told CIO the firm was “pleased that the matter has been resolved.”

From its founding in 1994 until 2006, Fenway raised three buyout funds ranging in size from $500 million to $900 million, according to the Wall Street Journal. After lackluster performance, Fenway told investors it wouldn’t raise another fund.

Investors in Fenway Capital Partners Fund III included OPERF and New York City Retirement Systems, according to the pensions’ annual reports. OPERF had $50 million committed to the fund, as of June 30, 2015, with a 2% internal rate of return. As a whole, 2006 vintage year private equity funds held by OPERF averaged a 5% internal rate of return.

The New York City Police Pension Fund had $15 million committed to the fund as of December 31, 2014, with an internal rate of return of less than 1%, compared to a 2006 vintage year average of 7%.

CalPERS also had $62 million invested with Fenway Partners as of June 30, 2014.

CalPERS announced in January that it would reduce its number of private equity managers by two-thirds, and is reportedly in the process of selling a $1 billion private equity portfolio, according to PE Hub. It is unclear if its stake with Fenway Partners will be included in the sale.

The settlement is the latest in a series of investigations of private equity firms by the US regulator, including charges against Blackstone for improper fee disclosure earlier this month.

Some of the world’s largest investors, including sovereign wealth funds (SWFs), have brought asset management in house in recent years, putting pressure on external managers’ revenues.

However, newly established sovereign wealth funds (SWFs) still require help accessing traditional investment strategies and mainstream asset classes, according to Cerulli Associates.

The company cited Nigeria’s planned trio of SWFs: “It is likely that much of that [work] will need the assistance of external managers,” said Barbara Wall, Europe research director.

Saudi Arabia has reportedly begun work on a second wealth fund, while Papua New Guinea, Mexico, Angola, Bangladesh, and Egypt are all at various stages of launching their own SWFs. Wall said such funds could be “lucrative sources of outsourcing mandates in their early years.”

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“The growing number of resource-rich countries establishing sovereign wealth funds present an ideal opportunity for asset managers not sufficiently specialized or alternative to win mandates from established SWFs,” Cerulli stated.

These claims contrast with the moves made in recent years by funds such as the Abu Dhabi Investment Authority (ADIA), which has taken major steps to bring asset management under its own roof.

“What’s unusual about this move is that instead of bringing passive assets under its own supervision, the management that is being brought back in-house appears to be quite technical and specialist,” said David Walker, head of Cerulli’s European institutional research practice.

Walker cited the creation of a “high conviction” sleeve in ADIA’s internal equities department as “not normally the sort of mandate that a fund like this would take in-house.”