Apollo Global Management has been caught (kinda/sorta) misleading investors in its private equity funds.
The SEC announced yesterday that Apollo has agreed to a $52.7 million settlement ― including a $12.5 million fine ― for several transgressions:
1. Fee folly: First, Apollo consented to a finding that it breached fiduciary duty by not informing limited partners in its private equity funds that it would engage in acceleration of portfolio company monitoring fees.
For the uninitiated, private equity firms often charge annual monitoring fees to their portfolio companies, ostensibly for management services. These are typically long-term agreements of upwards of 10 years. But if the private equity firm sells the portfolio company before the monitoring agreement expires (or takes the company public), it often accelerates full payment of the remaining balance(because the only thing better than getting paid is getting paid for work you didn't do).
Such a practice is common in private equity, and the SEC acknowledges that Apollo consistently disclosed the amount of fees accelerated after such actions were taken. The trouble, however, is that Apollo never put any mention of fee accelerations in its original documentation. Kind of amazing given the size of the LP agreements, but clearly this is a law firm boilerplate issue, since the SEC has found the same deficit at several bulge-bracket buyout firms.
A spokesperson for Apollo says that the firm no longer engages in accelerated monitoring fees.
2. Taxing: Apollo’s sixth flagship private equity fund borrowed approximately $19 million from four of its parallel funds, for the undisclosed purpose of deferring taxes that Apollo executives would owe on carried interest from those parallel funds.
Here is Apollo’s explanation:
“The SEC alleges that in a footnote to the Fund VI financial statements, Apollo did not adequately disclose that the interest on a loan would accrue to the General Partner of the Fund. Apollo successfully recapitalized two Fund VI portfolio companies in 2008, generating gains for its fund investors. Rather than distribute Apollo’s portion of those gains to it, Apollo’s share of the gains was lent to it in order to more closely align its taxable income with the cash proceeds. Apollo paid about $3 million in interest on the loan, which was then allocated as income to Apollo and on which taxes were paid by Apollo. To put this in perspective, Fund VI was a $10.4 billion fund. The loan was terminated in two stages in 2011 and 2013. At no time were fund investors any worse off as a result of the loan. The loan to Apollo was fully disclosed in the footnotes to Fund VI’s financial statements. The SEC took issue with the disclosure regarding the allocation of the accrued interest on the loan.”
3. Expensive expenses: Apollo allegedly twice caught a then-senior partner at the firm “improperly charging personal items and services to Apollo-advised funds and their portfolio companies.” The individual went so far as to fabricate information to cover his tracks, but Apollo only reprimanded him before a subsequent investigation led to even more instances of wrongdoing. In short, Apollo did a lousy job of supervision.
Apollo would later inform the SEC about this individual, and would part ways with him in early 2014.
“The executive agreed to a formal separation agreement with the firm after repaying all of the personal expenses he improperly charged as well as the cost of the internal review conducted by Apollo,” said the firm in a statement. “Apollo reimbursed its funds for any improper expenses, voluntarily reported the matter to the SEC and cooperated fully with the agency’s review.”
Apollo declined to name the wrongdoer, but we've learned it was Ali Rashid, a onetime Goldman Sachs banker who worked at Apollo between 2000 and his early 2014 termination. He subsequently did some work with private investment firm called Cain Hoy Enterprises but, according to a Cain Hoy receptionist, is not a firm employee. The SEC’s investigation into Rashid's activities remains ongoing.
A source familiar with the situation says that Rashid has cooperated with Apollo’s investigation. Rashid himself did not return a request for comment, and Apollo declined to confirm or deny that Rashid was the former executive in question. The SEC also did not return a request for comment.
THE BIG DEAL
• Pfizer Inc. (NYSE: PFE) has agreed to acquire a small molecule anti-infectives business from AstraZeneca (LSE: AZN) for upwards of $1.575 billion (including $550 million in up-front payments). Read more.
VENTURE CAPITAL DEALS
• DroneDeploy, a San Francisco-based drone data management platform, has raised $20 million in Series B funding. Scale Venture Partners led the round, and was joined by HighAlpha and Scott Dorsey (co-founder of ExactTarget). Read more.
• Centricient, a Bozeman, Mon.-based provider of text messaging solutions for connecting companies with customers, has raised $6.5 million in new VC funding. Venrock led the round and was joined by Next Frontier Capital. www.centricient.com
• SigOpt, a San Francisco-based research optimization and machine learning startup, has raised $6 million in new VC funding led by return backer Andreessen Horowitz. Read more.
• Wooptix, a Spain-based developer of 3D imaging solutions for smartphones and other devices, has raised $3.3 million in Series A funding. Bullnet Capital and Intel Capital co-led the round, and were joined by Caixa Capital Risc. www.wooptix.com
• MeQ Inc. (d.b.a. Even), a San Francisco-based developer of personalized listening technology, has raised $2 million in Series A funding led by Firstime Venture Capital. www.geteven.co
• Fusion Coolant Systems, a Canton, Mich.-based developer of carbon dioxide cooling and lubrication solutions to metal cutting and forming applications, has raised $1.25 million in a first close of its Series B funding. The University of Michigan’s Investment Office’s venture program (MINTS) led the round, and was joined by Amherst Fund LLC. www.fusioncoolant.com
PRIVATE EQUITY DEALS
• Canada Pension Plan Investment Board is in “early discussions” to acquire the insurance business of Lloyd’s of London from American International Group (NYSE: AIG), according to the WSJ. Read more.
• CCMP Capital Advisors has agreed to acquire Badger Sportswear, a Statesville, N.C.-based maker of team uniforms, performance athletic wear and fanwear. No financial terms were disclosed. www.badgersports.com
• Gryphon Investors has acquired HEPACO, a Charlotte, N.C.-based provider of critical environmental services on both an emergency response and planned basis, from Carousel Capital. No financial terms were disclosed. www.hepaco.com
• Panopto, a Seattle-based provider of enterprise and education video solutions, has raised $42.8 million in new funding. Sterling Partners led the equity tranche, while Square 1 Bank underwrote a senior credit facility. www.panopto.com
• Revelstoke Capital Partners has acquired Fast Pace Urgent Care, a provider of urgent care and primary care services in Tennessee, from Shore Capital Partners. No financial terms were disclosed. www.fastpaceurgentcare.com
• Saban Capital Acquisition Corp., a blank check acquisition company affiliated with investment firm Saban Capital, has filed for a $200 million IPO. It plans to trade on the Nasdaq under ticker symbol SCACU, with Deutsche Bank Securities and Goldman Sachs serving as lead underwriters. www.saban.com
• Pinterest has acquired Instapaper, maker of a popular 'save it later' app. No financial terms were disclosed. Sellers include Betaworks. Read more.
• Fitbit (NYSE: FIT) has been cleared by a U.S. International Trade Commission judge of stealing trade secrets from rival fitness tracker maker Jawbone. Read more.
• Elon Musk plans to buy $65 million worth of "solar bonds" in SolarCity (Nasdaq: SCTY), which has agreed to be acquired for $2.6 billion by Tesla Motors (Musk is CEO of Tesla and chairman of SolarCity). This appears to be the first time that Musk has purchased SolarCity bonds. Read more.
FIRMS & FUNDS
• Bain Capital has agreed to partner with India’s Piramal Enterprises Ltd. to invest in distressed assets. Read more.
• The Westly Group is raising upwards of $150 million for its third VC fund, according to a regulatory filing. www.westlygroup.com
MOVING IN, ON & UP
• Christina Lee is leaving venture capital firm Kleiner Perkins Caufield & Byers, where she has been marketing and communications partner since 2011. No word yet on her future plans. She will be succeeded by new hire Amanda Duckworth, who previously founded and led the San Francisco office for PR firm Brunswick Group. Brunswick Group
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Michael Steinmetz, a healthcare venture capitalist for nearly two decades, recently passed away unexpectedly from heart failure.
Steinmetz had been a managing director with Cambridge, Mass.-based Clarus Ventures since its formation in 2005, before which he was a general partner with MPM Capital. His investments have included more than 10 companies that went on to become publicly-traded, plus many more that were sold to large pharma companies. At the time of his death, Steinmetz was sitting on the boards of seven companies, including Tetralogic (Nasdaq: TLOG), Heptares Therapeutics and Lycera.
“All of us at Clarus will miss Michael greatly,” the VC firm said in a statement. “He had a positive and lasting impact on our firm, as well as our individual lives. We will always remember him as wise, kind, and thoughtful man.”
Prior to becoming a VC in 1997, Steinmetz held various executive roles at Hoffmann-LaRoche, including global head of biotechnology. He also worked at both Caltech and the Basel Institute for Immunology, after receiving his PhD from the University of Munich.
Steinmetz is survived by his wife Cornelia, and children Lars, Thomas, Stephanie and Silja.
The family has set up a nonprofit foundation in Steinmetz’s memory, to find a cure for (and aid families affected by) Familial Dilated Cardiomyopathy, the inherited form of heart disease from which he died. Donations can be made online (find “Genetics- Steinmetz Cardiomyopathy Fund- IMO Michael Steinmetz” via the drop-down menu), or at:
Genetics- Steinmetz Cardiomyopathy Fund- IMO Michael Steinmetz
P.O. Box 20466
Stanford, CA 94309-0466
Michael’s son Lars, a Stanford genetics professor and co-director of the Stanford Genome Technology Center, will lead the research.
Rest in peace Michael.