Broker-dealers and their reps who sold private placements for GPB Capital were paid tens of millions of dollars in commissions, but now must face clients whose investments have dropped in value dramatically.
According to a GPB document sent to broker-dealers on Friday, GPB raised $1.8 billion from wealthy investors who bought the high-risk private placements from registered reps and their broker-dealers. Collectively, they were paid $167 million in fees and commissions for the transactions. That means brokers and their firms collected 9.3% of the money clients invested into GPB private placements.
Securities industry rules put a cap of 10% on commissions firms and brokers can collect when selling a product to clients, and the commissions paid by GPB are not out of line with industry practice. Investments such as limited partnership private placements typically pay 7% commission to the broker and 2% to the rep's broker-dealer. In comparison, commissions on mutual funds are typically less than half that amount.
Meanwhile, as clients were paying steep commissions, the value of what they actually own in their investments dropped dramatically. GPB last week estimated the value of its seven funds to be $1.1 billion, or 61% of the initially raised capital.
GPB's focus is to buy auto dealerships and waste management businesses with the intent of generating high, single digit returns for clients.
One fund in particular stands out: GPB's Armada Waste Management. According to GPB, investors bought $163.4 million of the securities, but the current estimated value of the fund is $53.4 million.
That means an investment of $50,000 in Armada Waste Management has declined in value 67.4%, and is now worth $16,330.
About 60 broker-dealers sold the GPB private placements.
When asked about the sharp declines in value of the private placements, a spokeswoman for the firm said: "GPB Capital is working to complete the audited financials, which will provide additional disclosure and information to the limited partners regarding performance."
One broker-dealer executive who did not want to be identified was dismayed by the latest valuations of the private placements by GPB, which acknowledged in March that it was being investigated by the FBI.
"GPB won't give any color about the valuations, and the brokers are saying, 'What the heck,'" the executive said. "This is how much your client paid to lose how much of their principal?"
In perhaps some consolation to investors, GPB said it has returned a total of $272 million to investors through distributions, which act like dividends. That accounts for 15% of investors' capital. All of that cash was a return of investor capital and not an investment return, according to GPB documents.
GPB started registering the funds with the Securities and Exchange Commission in 2013, according to the documents it filed.