July 2019: We reported on GPB Capital Holding’s staggering $700 million loss across all of its funds. GPB was forced to issue this new valuation after Fidelity threatened to deplatform the company. Last year GPB Capital Holdings plunged from $1.8 billion to $1.1 billion Regulatory Assets Under Management. The loss was never explained by GPB Capital Holdings in any way.
June 2020: David Gentile, sole manager of GPB Capital Holdings, had GPB’s Chief Compliance Officer Aileen Doherty file the SEC-required Form ADV on June 30, 2020. This latest ADV shows GPB’s Regulatory Assets Under Management (RAUM) as $238,637,198. Scroll down to the bottom of this article to read the new Form ADV.
If we rely upon the June 2020 ADV number of $238,637,198, GPB Capital Holdings incurred a mind-blowing ~$861 million loss in one year. Using round numbers:
2018: GPB’s stated AUM is $1.8 billion.
2019: $1.1 billion: The AUM as stated in the new valuation published by GPB Capital Holdings
2020: $239 million: The RAUM as stated in the June 30, 2020 Form ADV.
2019-2020: GPB Capital Holdings’ aggregate loss is $1.561 billion.
Here is the posted RAUM from the June 30, 2020 ADV:
Where did all the money go? How much did Scientologist David Gentile put into the Church of Scientology’s coffers via the IAS, Hubbard College, and its many other front groups?
GPB’S INABILITY TO HIRE A THIRD-PARTY VALUATION SERVICE PROVIDER & WHAT IT MEANS
The only number GPB offers in its latest Form ADV is $238,637,198 RAUM.
RAUM means “Regulatory Assets Under Management” whereas AUM means “Assets Under Management.” RAUM is a different metric than AUM. The SEC mandated the use of RAUM in Form ADV in 2012. Readers can scroll down to the bottom of this article to read the Managed Funds Association’s short precis on understanding RAUM.
We have no idea what GPB’s most recent RAUM number actually means. This is due to the fact that GPB disclosed in its latest ADV that it was unable to hire a third-party Valuation Service Provider in 2019. This has serious implications. Specifically, GPB admits in this latest ADV that its June 2020 RAUM is based upon June 2019 values:
Regarding the Advisors answer to Item 5(F)2, the values reflected for the regulatory assets under management are as of June 31, 2019. GPB was unable to conduct valuations in third and fourth quarters of 2019 due to the lack of a third-party Valuation Service Provider. GPB has been unable to provide a final asset under management figure for the year ending December 31, 2019. GPB policy requires the use of a valuation provider to support its Valuation Committee in determining appropriate valuation and assets under management. GPB is in the final stages of interviewing replacements.
Given the above statement, we must ask if the $239 million RAUM is a meaningful number at all. On the other hand, GPB may have created a convenient Catch-22 for itself when it writes, “GPB policy requires the use of a valuation provider to support its Valuation Committee in determining appropriate valuation and assets under management.” This policy requirement, along with GPB’s inability to do something as simple as hiring a third-party Valuation Service Provider during 2019, allows GPB to refrain from stating a real value of its holdings. It all seems like smoke and mirrors.
The AUM vs RAUM question also speaks to the civil complaint against GPB Capital Holdings filed by the Commonwealth of Massachusetts. In its civil complaint against GPB Capital Holdings, Massachusetts securities regulators noted the “structurally complex” nature of the GPB Capital and its myriad conflicts of interest and self-dealing:
By its nature, GPB Capital is structurally complex. Its funds have a number of sub-funds, and those sub-funds have various ownership interests in portfolio companies.
Some of GPB Capital’s funds jointly own portfolio companies, like the Prime Automotive Group. Moreover, the property on which many dealerships sit is owned by separate companies under the GPB Capital umbrella.
GPB Capital has many hundreds of bank accounts under its purview.
The structural complexities of GPB Capital Holdings; its funds and sub-funds; and hundreds of bank accounts will be unraveled in due course by regulators and, hopefully, prosecutors.
WHY GPB CAPITAL HOLDINGS CANNOT STATE THE TRUE VALUE OF ITS ASSETS
Given the inherently complex and deceptive structure of GPB Capital Holdings, we must ask if the $239 million RAUM represents only “Regulatory Assets Under Management” as opposed to a larger amount GPB Capital Holdings deems to fall outside of public reporting requirements.
GPB Capital Holdings is classed as an “Investment Adviser.” This means it has to fill out Form ADV. However, in GPB’s 2018 Part 2A ADV a/k/a “The Brochure” the company states (emphasis ours):
GPB Capital Holdings, LLC, a Delaware limited liability company (“GPB” or the “Manager”), is a New York-based middle-market acquisition and operations firm whose principals are experienced financial, management and accounting professionals with several decades of combined private investment and acquisitions experience. GPB serves as general partner and/or manager for various companies (each, a “Company,” and collectively, the “Companies”) which do not meet the definition of “investment company” and thus will not register under the Investment Company Act of 1940, as amended (the “1940 Act”) and whose fund interests (“Interests”) are not registered under the Securities Act of 1933, as amended (the “1933 Act”). GPB was formed in March of 2013 and is owned by David Gentile.
The principal purpose of each Company is to acquire controlling majority (and in many cases, wholly owned) interests, whether equity, debt or otherwise, in income-producing, middle-market private companies in North America; to provide hands-on managerial and operational assistance to such companies; and to further develop operations of such companies and increase cash flow and current income from operations…
As of December 31, 2017, GPB had approximately $434,286,529 in regulatory assets under management, all of which is managed on a discretionary basis. GPB’s regulatory assets under management does not include the assets of certain GPB-managed Companies, which are holding companies that are (i) excluded from the definition of “investment company” under the 1940 Act; and (ii) do not otherwise meet the definition of securities portfolios for the purposes of calculating an adviser’s regulatory assets under management.
GPB excludes the value of the assets in its holding companies in its RAUM. This lack of financial transparency is part and parcel of the undisclosed and excessive fees, the high commissions to B-D’s, and all of the other dishonest intentions, tactics, and practices of GPB Capital Holdings. It is exactly as the Commonwealth of Massachusetts wrote:
[GPB’s] funds have a number of sub-funds, and those sub-funds have various ownership interests in portfolio companies.
In its June 2020 ADV, GPB admitted to its inability to hire a third-party Valuation Service Provider in 2019. This has serious implications. Specifically, GPB stated that its inability to hire a valuation firm resulted in its June 2020 RAUM being wholly based upon June 2019 numbers (emphasis ours):
Regarding the Advisors answer to Item 5(F)2, the values reflected for the regulatory assets under management are as of June 31, 2019. GPB was unable to conduct valuations in third and fourth quarters of 2019 due to the lack of a third-party Valuation Service Provider. GPB has been unable to provide a final asset under management figure for the year ending December 31, 2019. GPB policy requires the use of a valuation provider to support its Valuation Committee in determining appropriate valuation and assets under management. GPB is in the final stages of interviewing replacements.
In our view, GPB’s complexity and dishonesty explain why no third-party valuation firm would want to do business with GPB Capital Holdings. No third party would want to sign off on anything given the deliberate complexity and dishonesty of a firm such as GPB Capital.
Given the foregoing information, we must ask if the $239 million RAUM is a meaningful number at all or just more private equity trash. On the other hand, GPB has created a convenient Catch-22 for itself when it declared, “GPB policy requires the use of a valuation provider to support its Valuation Committee in determining appropriate valuation and assets under management.” This policy requirement, along with GPB’s inability to do something as simple as hiring a third-party Valuation Service Provider during 2019, allows GPB to refrain from stating a real value of its holdings. Of course, we pause to note that GPB Capital Holdings still owes investors and the SEC those 2015 and 2016 restated financial reports.
FRAUD AB INITIO?
With respect to the allegations contained in the civil action filed against GPB Capital by the Commonwealth of Massachusetts, we ask if GPB Capital is a case of fraud ab initio, i.e. if GPB Capital was a fraud from the beginning. Given the Gentile-Schneider undisclosed and bad faith architecture of paying excessively high commissions, paying themselves excessive fees at every step of the way, and failing to disclose their self-dealing and numerous conflicts of interests, we think there is a case to be made that GPB Capital was inherently fraudulent from the beginning.
The the undisclosed and self-serving relationships between GPB Capital, Ascendant Capital, and Ascendant Alternative Strategies is certainly an example of self-dealing with deliberate intent to defraud investor. As stated in the Massachusetts complaint against GPB:
Ascendant Capital is wholly-owned by Gentile’s business partner Jeffry Schneider. Ascendant Capital began as a branch office of a New York-based broker-dealer but in 2017 became a branch office of the Gentile-owned broker-dealer Ascendant Alternative Strategies, LLC (“Ascendant Alternative Strategies”). Not only did Gentile engage Schneider in drafting key documents and attending internal GPB executive meetings, but GPB Capital functionally gave Schneider the exclusive right to sell GPB Capital funds.
Eventually, Gentile sought to fully integrate and take control of Ascendant Capital’s broker-dealer activity, and registered his own broker-dealer. In March 2017, Ascendant Alternative Strategies registered as a broker-dealer with the Securities & Exchange Commission and FINRA. On October 10, 2017, Ascendant Alternative Strategies registered as a broker-dealer in Massachusetts. The firm’s main owners and control persons include Gentile and Schneider.
Ascendant Capital then became a registered branch office of Gentile and Schneider’s new broker-dealer. GPB Capital paid Ascendant Alternative Strategies and Ascendant Capital millions of dollars in connection with marketing GPB Capital funds and in connection with acquisitions made by GPB Capital. Publicly, GPB Capital and Ascendant Capital sought to appear as two distinct companies, but in reality, they were one-and-the-same.
OTHER ITEMS OF CONCERN IN GPB CAPITAL’S JUNE 2020 ADV
1. GPB’s statement about Highline Management, Inc:
Regarding Item 7, Highline Management, Inc. (“Highline”) was formed in January 2020 to assume the day to day duties and responsibilities of GPB with respect to the management of the business affairs, operations and financial reporting of the various limited partnerships sponsored by GPB as well as the Portfolio Companies.
Why did GPB Capital Holdings need to form a new and separate company to, “assume the day to day duties and responsibilities of GPB with respect to the management of the business affairs, operations and financial reporting of the various limited partnerships sponsored by GPB as well as the Portfolio Companies”? Our research shows a “Highline Management, Inc.” as being a Delaware corporation. But who are the officers? Who owns Highline Management, Inc.?
Another problem presents itself. Now that Highline Management Inc. is running GPB Capital, Highline would have to interview and hire a third-party valuation firm to conduct a valuation, and, a valuation is somewhat like an audit. An audit can only be as accurate as the party being audited provides honest and correct information and opens its books fully. The same is true of a valuation. Therefore, we ask if GPB Capital’s inner circle (Gentile and Schneider) would fully disclose everything to Highline.
LinkedIn shows Wally Bishop, a long-time exec at Deutsche Bank, serving on the Board of Directors and the Audit Committee at Highline Management:
LinkedIn also shows Tom Hawkins serving on the Board of Directors of Highline Management:
On his LinkedIn page, Hawkins represents that GPB Capital Holdings (though he does not use the GPB name) has $1.5 billion in investments. This is in direct contradiction with GPB’s stated RAUM of $238 million. It also ignores GPB’s 2019 devaluation downwards to $1.1 billion.
2. The Car Guys:
Tom Hawkins worked for AutoNation in the past. GPB’s Prime Automotive Group is headed by CEO Tom Skelton who spent 24 years at AutoNation. Skelton was the President of AutoNation’s Northeast US Division when he left in 2020 to take the CEO slot at Prime Automotive Group.
Skelton replaced Prime Automotive’s Interim CEO Kevin Westfall, another AutoNation alumnus. Kevin Westfall originally stepped in to replace David Rosenberg who was fired as CEO of Prime Automotive by GPB Capital. Rosenberg sued GPB and the parties are now locked in an acrimonious lawsuit.
It seems AutoNation alumni have an inside track at GPB Capital Holdings. For better and worse, the “car guys” seem to have a great deal of influence at GPB:
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- Former AutoNation car guys are now in leading GPB Capital’s Prime Automotive Group.
- A former AutoNation car guy is now on the Board of Highline Management Inc. This leads us to ask if a career car guy like Tom Hawkins is up to the task of managing a third-party valuation firm as it attempts to value GPB’s assets across a wide range of divergent portfolio companies such as biotech, cold storage, and healthcare software.
David Rosenberg’s lawsuit against GPB.
Patrick Dibre’s lawsuit: Read GPB’s claim and Dibre’s counterclaim.
Volkswagen of America is suing GPB Capital/Prime Automotive group.
3. The statement concerning the role of Jeffry Schneider and Mark Martino of Ascendant Alternative Strategies:
Regarding the Adviser’s response to Item 7(B)(1)(A)(28), it should be noted that Ascendant Capital, LLC a related party of ASCENDANT ALTERNATIVE STRATEGIES, LLC (Member FINRA/SIPC (CRD# 283881 / SEC# 69769)), provides services to GPB Capital Holdings, LLC and its clients and indirectly receives, and may directly receive, reimbursements or other compensation from such parties.
As mentioned, the self-dealing relationship between GPB, Ascendant Capital, and Ascendant Alternative strategies is embodied in the Massachusetts civil complaint.
4. This statement concerning “other investment-related business activities conducted” at GPB Capital Holdings office in Austin, Texas. This speaks to the role Mike Frost’s company “Austin Lake Technologies” plays within the GPB Capital scheme:
Describe any other investment-related business activities conducted from this office location:AUSTIN LAKE TECHNOLOGIES CURRENTLY SHARES OFFICE SPACE WITH ADVISER PERSONNEL. AUSTIN LAKE TECHNOLOGIES IS AN INDEPENDENT OPERATIONS SUPPORT PARTNER THAT PROVIDES STRATEGIC, MANAGEMENT, AND OPERATIONS CONSULTING SERVICES TO THE ADVISER.
Question: If Highline Management, Inc. was created to manage the daily business operations of GPB Capital Holdings then why is Austin Lake Technologies also required as an “independent support partner that provides strategic, management, and operations consulting services to the adviser”? GPB Capital Holdings conducted its own business operations since its inception in 2013. Suddenly, however, David Gentile apparently needs to pay two outside companies in order to help him get out of bed in the morning.
Left unexplained in the Form ADV is how Health Prime, a GPB Capital portfolio company, is now owned by Mike Frost’s Austin Lake Technologies. See our recent article on this puzzling development.
Note: Some sources give the value of GPB’s AUM as $1.5 billion. We use GPB’s number of $1.8 billion AUM. GPB Capital gave this number when they were at their peak and were promoting themselves as the hottest private equity fund in town — as were their broker-dealers who were getting obscene commissions averaging about 8%. The $1.8 billion number has also been used in the Kinnie Ma lawsuit and other lawsuits.
GPB Capital’s Form ADV of June 30, 2020:
GPB Capital’s 2018 Part 2A of Form ADV:
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The Managed Funds Association’s short precis on RAUM:
Categories: The Scientology Money Project
21st century robber barons!
Hiding behind the skirts of their high-priced attorneys just as they did in the 19th and 20th centuries. As for the Church of Scientology, I smell COLLSION….. and it stinks.
I spent several hours last night poring over the ADV and reviewing Jeff’s post. I have to admit that even I, a financial industry professional, am baffled as to what’s going on here. Usually, it’s not hard to guess at what’s at the heart of a fund falling apart, but there are so many different things apparently going on here that it’s really impossible to tell, and it’s impossible to predict how things will turn out, other than being certain that they’ll end badly for investors.
This latest writedown makes it a virtual certainty that the investors in GPB will get nothing back. Beyond that, it’s hard to say exactly how things will fall apart and when, other than being certain that it’s going to be painful.
I seem to recall reading that some of the investors either were promised or actually got distributions starting immediately after contributing. The promise was (IIRC) 8% per month, in other words 96% per year, in other other words, doubling your investment every year. That’s a huge red flag — a long-term private equity investment is supposed to focus on long-term capital appreciation instead of current income. You put your money in, wait 5-10 years, and then the portfolio companies are either sold or go public, and you get a much higher return than if you took distributions along the way. Any private equity fund that offers immediate and improbably high returns is suspect from the get-go.
The point of the above paragraph is to note that it is possible that GPB paid out a lot of money in distributions, which is part of the writedown in assets. That’s pretty stupid but is not necessarily criminal — collecting money from investors, charging them 8% to 11% commissions, then keeping the money in a money market account and just handing it back as “distributions,” to be taxed again is incredibly dumb, but it may or may not be a crime depending on the precise details.
However, that’s less likely than that either the GPB management was hopelessly incompetent, vastly overpaying for assets that really weren’t worth a lot, or that the whole thing was a willful fraud from the beginning. We simply don’t have enough information as yet to hazard a guess as to which it is, but it’s clear that there are investigations going on that will answer that question.
As to incompetence: the idea of consolidating an industry, such as a bunch of independent car dealerships and garbage companies, and cutting costs by sharing sales and back-office functions, is a standard business school term project, and it happens a lot in the real world. The only problem is that both car dealerships and garbage haulers had already been through a wave of consolidation 20-30 years ago, and they were rolled up by really smart guys who continue to look for good acquistion candidates and have the cash in hand to snag them. The only acquisition candidates available to GPB, therefore, were the ones the smart money had already picked over. Naive fund managers who don’t know their industry were potentially likely to overpay significantly chasing this dream.
One other thought occurs to me: I’d hate to be one of those retirees who got a distribution from GPB. In the event that GPB and its management are charged criminally, those people who received distributions are subject to “clawback” rules. Just as happened in the Bernie Madoff case, the government is required to collect the proceeds of a crime from those who received them, even if the recipients are not in any way suspected of criminal behavior. In other words, innocent people would have to surrender their distributions, even if they have to dig deep to do so because it was money they lived on. They would be entitled to some recovery out of the rubble left, on an equal basis with people who didn’t get distributions, but that’s obviously going to be a lot less than what’s clawed back.
Thus, the tragedy of the GPB situation for investors is that they’re reduced to hoping that this is merely massive incompetence and not fraud, because if it’s fraud, then they will be subject to more financial distress via clawback rules than they already have been.