Lessons from the Caspersen case

A little due diligence goes a long way, and that’s no less true for secondaries than any other part of the financial services industry.

This week the financial services industry was rocked by the arrest and charge of Andrew Caspersen – a former managing director at advisory firm Park Hill, and before that a principal at Coller Capital – for allegedly attempting to defraud two institutional investors of more than $95 million.

Park Hill has said it started an internal investigation immediately upon learning about the suggested improper behaviour and swiftly notified the Manhattan US Attorney’s Office.

Secondaries market sources I’ve spoken to this week have all expressed their shock and disbelief over the arrest, using terms like “unreal”, “bizarre” and “insane”.

“This is bad for the financial services industry as a whole, and I don’t like it that it happens to be someone from our sector,” one source at an advisory firm told me.

Caspersen, who joined Park Hill in 2013, allegedly created a fake credit facility to support a real stapled secondaries transaction, according to the US Department of Justice’s complaint.

Shock and disbelief aside, the industry participants I spoke to were somewhat divided over the role of the secondaries market in the case. Two sources I spoke to pointed out the alleged wrongdoings had little connection to secondaries and private equity practices generally.

Should the allegations prove to be true, one source said, “It could have been in any sector.”

But others say it’s hard to ignore the DOJ’s complaint that Caspersen – a decade-long Coller veteran who joined Park Hill when it was part of Blackstone and was known to lead large, complex fund restructurings – allegedly used the guise of a restructuring deal and his connections with those name-brand firms to carry out the alleged fraud attempts.

The opacity and complexity of the secondaries market, coupled with being part of an asset class that thrives on relationships, may have played a role, some sources say.

“People see a nice, steady large return, and they hate to ask questions too hard because then they’re put in a position where they might need to pull their money or not invest,” says Anne Beaumont, a lawyer who works on financial services litigation at Friedman Kaplan Seiler & Adelman in New York. “There’s really a psychological component to people not wanting to question a good thing.”

Beaumont is quick to point out that fraud happens in any industry. But she noted it was a wake-up call for investors in private equity, which is not subject to the same regulatory framework as hedge funds, for example, which have tighter scrutiny.

While the impact of this case is not likely to affect the number of restructuring deals that get done or LPs’ attitudes towards them, one take-away is that it never hurts investors to exercise strict due diligence procedures, regardless of the financial sector or asset class.

“Institutional investors in the hedge fund space have no problem being incredibly aggressive with managers and pushing them hard to get satisfactory answers,” Beaumont said. “The private equity space is going to have to learn to do that in a polite and thoughtful way.”

Are due diligence processses surrounding secondaries investments robust enough? Send me your thoughts at adam.l@peimedia.com