In this fictional account, Able Bentley Capital is a $500 million private equity fund (“ABC”). ABC is formed as a Delaware limited partnership, and the general partner (“GP”) is ABC Partners. (For a discussion of limited partnerships, see my post “LP Corner: US Private Equity Fund Structure - The Limited Partnership.”) ABC makes a number of international investments. Bill Smith is one of managing partners of the management company and a member of the GP. Bill sources and leads several international investments. It is common in international investments to have the fund’s investment flow through one or more intermediate (known as “blocker”) shell companies in order to shield the fund from negative tax consequences. Using a complicated blocker structure, Bill was able to defraud ABC out of several million dollars. The fraud was eventually discovered and after several years Bill was convicted of fraud and embezzlement.
Situations where a GP (or a principal of the GP or management company) behave truly badly are rare, but they do occur. The question becomes, what should happen when really bad behavior occurs? Read on to find out!
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