Where Institutional Investors Should Be Asking Questions: W.L. Ross
The Wall Street Journal published a story yesterday about a lawsuit filed by a former Senior Managing Director of W.L. Ross against his former employer. David Storper alleges that W.L. Ross failed to give him sufficient access to its investment records when he pointed out irregularities in his investment account with the firm. If I were the CIO or head of private equity at a public pension plan or endowment, I’d be getting up to speed on this lawsuit.
W.L Ross is a private equity firm established in 2000 and sold to Invesco in 2006 that specializes in distressed investments and restructurings. Mr. Storper worked closely with Wilbur Ross, a very successful turn-around specialist for many years before leaving in 2012. At the time Mr. Ross said the parting was amicable.
Mr. Storper alleges that the financial statements he received from W. L. Ross contained valuation discrepancies as well as large, irregular, and unexplained fund expenses. According to the Journal, W.L. Ross was unwilling to furnish Mr. Storper with the underlying records for a series of funds, and he is now asking the Delaware Chancery Court to compel the firm to furnish him with the records.
After reading the article, I think that W.L. Ross’s investors ought to be concerned. Since Mr. Storper was an investor in the same funds, there’s some chance that the alleged inconsistencies and irregularities also exist for every investor. If I were still managing a pension plan, I’d be asking W.L. Ross for a great deal of detailed information.
Private equity firms have enormous control over valuations, as well as the allocation of fees and expenses between the general partner (themselves) and the limited partners (the investors). Although accountants audit the books, there is a great deal of complexity and opacity involved in determining the numbers that eventually represent the investors’ net investment and return in a fund. The SEC has already pointed out any number of irregularities during its examination of PE firms. Large private equity investors have commitments to hundreds of private equity funds, so the task of validating valuations, expenses, and returns is daunting. However, Mr. Storper has given them a good place to begin. Institutional investors ought to devote some real time and effort to examining the books and records of W.L. Ross.