GPB Capital Holdings will overhaul and restate the 2015 and 2016 financial statements of certain funds as part of its accounting review, according to letters sent to broker-dealers.
Last week, InvestmentNews reported that GPB Capital Holdings, a leading seller of high-risk, high-commission private placements with $1.8 billion in investor money, was taking a break from raising new money to focus on straightening out the accounting and financial statements of its two large funds.
Since then, details have emerged about the accounting issues. According to letters using the same language, investors should no longer rely on 2015 and 2016 financial statements and independent accounts' reports for three series of private placements: GPB Automotive Portfolio, with $622.1 million in capital; GPB Holdings II, with $645.8 million; and GPB Holdings Qualified. The last fund's most recent registration statement with the Securities and Exchange Commission showed no money raised from investors.
Accounting issues dogging the firm include income recognition and related party transactions.
"We currently expect that the restatements will include adjustments to the 2015 and 2016 financial statements for items including reclassification of certain transactions and/or corrections in the timing and amounts of income recognition, and enhanced disclosure of certain related party transactions," wrote David Gentile, CEO of GPB Capital Holdings, in one of the letters from last week. "There may be additional items that come to our attention related to the 2015 and 2016 financial statements in the process of completing the 2017 audits.
"In light of the above, we have concluded that certain material weaknesses in internal controls exist, and as a result these internal controls over the financial reporting processes will need to be revised and enhanced," Mr. Gentile wrote.
GPB's current predicament should serve as a wakeup call and reminder of the importance of independent audited financial statements, whether required or not, on such deals, noted Michael Kell, vice president at AI Insight Inc., which focuses on investment research, financial adviser education and compliance documentation for alternative investments.
"Other investment managers, especially smaller private managers, should use this as an opportunity to review their own internal policies, procedures and controls to ensure not only compliance and adequate transparency but a commitment to preventing situations like this from happening in the future," he said.
A spokesperson for GPB, Dana Taormina, said, "GPB Capital is working diligently to complete the financial statements for the funds that have audit delays so that our auditors can complete their work. At the same time, we are working on the necessary adjustments to the 2015 and 2016 financial statements."
GPB Capital missed an April 30 deadline to file financial statements with the Securities and Exchange Commission for two of its largest funds: GPB Automotive Portfolio and GPB Holdings II. As InvestmentNews reported last month, both funds crossed industry thresholds for making such information public more than a year ago.
As many as 60 broker-dealers sold the funds. While many were smaller IBDs, among the most prominent firms listed in SEC filings were the four Advisor Group broker-dealers — Royal Alliance Associates Inc., Sagepoint Financial Inc., FSC Securities Corp. and Woodbury Financial Services Inc.
Brokers and advisers can sell private placements, also known as Reg D deals, to wealthy, accredited investors and institutions. Private placements have far fewer regulatory standards to adhere to than publicly listed companies. The minimum investment in GPB Automotive Portfolio was $100,000.
Mr. Gentile, who ran his own advisory and accounting firm before launching GPB, pointed to the number of acquisitions made by the company last year and the "high degree of complexity" in SEC and Public Company Accounting Oversight Board requirements as taking more time than anticipated, according to the letter.
"Consequently, we have agreed with the company's independent auditor to pause their audit, and over the next 75 days or less, the company will work to prepare, analyze and review the additional supporting documentation required to finalize its consolidated financial statements," according to the letters. "Once the additional work is finalized internally, we will ask our auditor to resume its work to complete the audit process for fiscal year 2017."