October 25, 2017
GREEN OAK - Photo by Luke Andrew Scowen - Oak Tree in May CC BY-ND 2.0

UNITE HERE Local 11 wrote to SEC Chairman Jay Clayton requesting that the agency investigate issues regarding private equity real estate firm GreenOak Real Estate policies that allow the firm to offer preferred fee terms and investment opportunities to co-investors, including, potentially, related-party hedge fund Tetragon Financial Group.  As of December 31, 2016, Tetragon Financial Group owned 23% of GreenOak and is a major co-investor in its funds.

The letter expressed concern with GreenOak policies that permit the firm to allocate the totality of “Deal Pursuit Costs” for unconsummated transactions to Fund investors—as opposed to Tetragon or other co-investors—at the discretion of the Fund’s general partner.

Congressman Keith Ellison (D-MN), a member of the House Financial Services Committee that oversees the SEC, as well as the subcommittees for Capital Markets, Securities and Investment and Oversight and Investigations, supported the call for SEC scrutiny of GreenOak. “I encourage the Securities and Exchange Commission to follow up on these allegations raised by UNITE HERE. These questions about preferred fee terms and investment opportunities provided to GreenOak co-investors deserve answers.”

The letter, which can be found here, urged the SEC to investigate a number of questions, including:

  1. How does GreenOak determine which co-investors receive priority rights with respect to investment allocation, and does GreenOak disclose its investment allocation policies to all Fund investors and co-investors?
  2. What fees has GreenOak charged Tetragon for Fund investments and co-investments, and how do those fees compare to fees charged to other Fund investors and co-investors?
  3. Have GreenOak Fund investors paid “Deal Pursuit” costs related to unconsummated investments contemplated for Funds and co-investors? If so, how much have they paid?
  4. Should GreenOak Fund investors receive reimbursement for any Deal Pursuit costs paid related to investments contemplated for co-investors, if those costs have been allocated in their totality to the relevant Fund rather than to potential co-investors?

These concerns speak directly to issues raised by then-Acting Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) Marc Wyatt and Andrew Ceresney, then Director of the SEC’s Division of Enforcement, regarding expense allocation and co-investment allocation. Ceresney stated in May 2016 that “Unless otherwise disclosed to investors, it is important for advisers to ensure that the costs of each potential investment are paid by those that might benefit from that potential investment’s return.”