SEC Settlement with Global Infrastructure Management

The Firm:

• Global Infrastructure Management, also known as Global Infrastructure Partners (“GIP”), manages private equity style infrastructure funds and invests in assets in energy, transportation, digital, water and waste sectors.
• GIP manages $77 billion in both infrastructure equity and credit which are housed in pooled investment vehicles, funds‐of‐one and separately managed accounts.
• GIP has an insourced operations and business improvement capability called the Business Improvement Team.

The Allegations:

Management Fee Not Offset Against Portfolio Company Advisory Fees – During a 10‐year period beginning in 2009 and ending in 2019, GIP charged a Fund I portfolio company $12.4 million for services that, according to the Fund I documents, should have offset the management fees.  GIP voluntarily refunded $4.2 million to investors which is based on the percentage of the company owned by Fund I and the required management fee offset.

• Analysis – Insourcing is a common practice engaged in by real assets managers and it is highly unlikely that this practice was isolated to Fund I.  The Commission’s focus on Fund I, which was formed decades ago, shows the staff’s desire and ability to look at older fund documents, which typically lack the robust disclosure of newer vehicles, for disclosure that would support violations.

Management Fee Not Offset Against Portfolio Company Director Fees – Between November 2016 and March 2019, a portfolio company investment held by Fund III paid GIP $1.26 million in directors fees which were not offset against the fund’s management fee as per the formation documents. The firm voluntarily reimbursed $674,362.

• Analysis – It is unusual for private equity Board members to collect fees unless they sit on the Boards of public companies.  Given that this is not a normal practice, this could very well have been a calculation error.

GIP Failed to Adopt or Implement Reasonable Policies and Procedures Regarding Portfolio Company Fee Offsets – GIP failed to have written policies and procedures in place to confirm that calculations were being made in a manner consistent with the LPAs.

• Analysis – This violation is derivative from the two violations noted above and is a reminder that fee and expenses analysis and testing should still be part of private market compliance programs.

GIP Failed to Adopt or Implement Reasonable Policies and Procedures to Identify and Address Inconsistencies in Fund Documents and Communications with Investors –

• (1) GIP’s Funds I and II “partially” disposed of a portfolio company but did not remove the capital attributable to that disposition from the management fee base for the purposes of post‐Commitment Period management fee calculation.
• (2) The LPAs for Funds I and II I LPAs each stated that the management fee would be calculated based on each limited partner’s capital contribution that was used to acquire a fund portfolio investment, and thus a partial disposition of the portfolio company would not reduce management fees.
• (3) However, the PPMs for Funds I and II each stated that following the termination of their respective commitment periods, the annual fund‐level management fee would be based on the “capital contributions relating to the retained portion of all Portfolio Investments with respect to which there has not been a complete disposition.”
• (4) In 2011 a limited partner investor specifically asked GIP whether a partial disposition would reduce management fees, and  a GIP employee responded in writing that partial dispositions would reduce management fees. GIP responded to several other limited partner inquiries that management fees would not be reduced by partial dispositions.
• (5) The firm voluntarily reimbursed $563,792, plus interest.
  • Analysis – (1) It is often unclear what constitutes a partial disposition and what constitutes a capital gain.  While this settlement does not provide additional facts, it is possible that there were some other indicia that a partial “return of” capital had occurred. (2) Unlike many similar cases, GIP followed the terms of their LPA and was sanctioned based partly on disclosure in their PPM and a 10‐year‐old communication with an investor.  This demonstrates an aggressive approach toward private capital managers. (3) While the description of the conduct appears to hinge on a possible misstatement, the charge is related to policies and procedures indicating that the disclosure aspect of this charge may not have had enough supporting evidence.

Penalty – The firm paid a $4.5 million penalty.