What does this mean for investors?
It’s not good.
Essentially, the SEC say Tilton and her firm haven’t followed the valuation methodology set out in the offering documents for the three funds, opting instead to provide their own subjective valuations, which put the value of the assets in those funds at a much higher level entitling them to significantly higher fees – $200 million worth according to the regulator.
These three CLO funds, collectively referred to as the Zohar funds, raised $2.5 billion from investors between 2003 and 2007 during the heyday of CLOs. In 2011, Forbes
questioned the quality of these CLOs suggesting the assets were the equivalent of junk status.
Three years later and it appears Tilton’s troubles have come home to roost.
The question for advisors is whether this particularly egregious case of alleged misrepresentation is a reflection of private equity investments in general or simply something specific to Tilton and her firm and not a common occurrence in the industry.
The answer surely will be determined at some point in the future.