One of Canada's largest asset managers accused of misleading investors
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One of Canada's largest asset managers is being accused of misleading limited partners in some of its private funds, as part of a wrongful termination suit brought by a Silicon Valley investor who led its growth equity business until last November.
Why it matters: The complaint alleges that maintaining AUM was valued over the best interests of those supplying the A, which has long been a tacit worry of LPs investing with publicly traded firms.
Driving the news: The plaintiff is Josh Raffaelli, who joined Brookfield in 2017 to build its venture capital program.
- Raffaelli previously had been a principal with DFJ, which introduced him to the Elon Musk universe, before spending time as a partner with Silver Lake Kraftwerk.
- He would initially invest off of Brookfield's balance sheet, before raising two dedicated funds and a series of SPVs. Several of Musk's companies were in the portfolio, including both SpaceX and X.
Zoom in: Raffaelli argues in his complaint that a market downturn in commercial real estate, which is Brookfield's core business, caused the firm to quietly pull back on its GP commitments to the venture capital funds (and also to larger private equity funds that Raffaelli didn't manage).
- But Brookfield didn't divulge its troubles to limited partners. Nor did it spin out the funds or stop the investment periods by cutting fund sizes. Instead, Raffaelli alleges that he was basically told to slow the investment pace, including by cutting back a planned investment in xAI by 80%.
- Last summer, Brookfield allegedly began thinking about merging his funds into a platform called Pinegrove, which had been formed by Brookfield and Sequoia Heritage to buy devalued VC assets (it soon would acquire SVB Capital). In short, it would keep the fund assets within Brookfield.
- He also alleges that Brookfield rejected an LP commitment of between $75 million and $100 million from a foreign conglomerate, which would have been added to the $565 million in his most recent fund. This one doesn't quite track with the AUM argument, except for Brookfield now needing to come up with its pro rata for new investments (including follow-ons).
Fast forward: Raffaelli didn't believe the Pinegrove transfer was in the best interests of his LPs, and also claims to have discovered that Pinegrove was inflating its own AUM in marketing materials.
- He brought these concerns to Brookfield management and, upon learning no actions had been taken, became an SEC whistleblower.
- Raffaelli informed Brookfield of his SEC communications, and claims he was fired days later. LPs only were told that he had decided to leave, and were eventually asked to approve the Pinegrove transfer (which does not seem to have yet closed.).
What Brookfield is saying, per a spokesperson: "This suit is absolutely without merit and these baseless claims run counter to how Brookfield manages its business. We will vigorously defend against this meritless suit, which was brought by a disgruntled former employee."
What Raffaelli is saying, per his attorney: "Brookfield repeatedly betrayed the trust and best interests of its investors, and then fired the employee who challenged its behavior. This is classic David versus Goliath."
Read the complaint:
