BlackRock went all in on Wall Street’s booming business of private lending last July when it acquired HPS Investment Partners, a firm founded by alumni of Goldman Sachs that was one of the stars of the sector.
Days after the deal closed, an analyst at HPS’s Midtown Manhattan headquarters spotted a big problem. The company was the lead lender on a more-than $400 million credit agreement with a telecom entrepreneur, Bankim Brahmbhatt, accepting as collateral accounts receivable the executive’s firm had acquired from other businesses.
Reviewing those invoices, the analyst noticed that the email address domain on one didn’t match what was on the website of the company it was supposed to be from. HPS dug deeper, and found the same issue again and again. The lender scrambled to get answers from Brahmbhatt, but he had left for India and eventually stopped picking up the phone.
Two weeks later, HPS was in court accusing Brahmbhatt of carrying out a “breathtaking” fraud. The emails were fake, the invoices were fake—and the collateral was worthless, they alleged.
Brahmbhatt disputes the allegations of fraud, his lawyer said last fall.
The wipeout of HPS’s loan took Wall Street by surprise. How could one of the most sophisticated private-lending firms in the world be so badly duped? Why didn’t anyone spot the issue before BlackRock, the world’s largest asset-management firm, sealed its deal with HPS? Could similar frauds be lurking in the $3 trillion dollar private-lending industry?
The borrower in this case hardly fit the profile of a sure bet for a lender. A review by The Wall Street Journal of his firm’s background revealed details that corporate diligence experts say should have set off alarms.
Brahmbhatt has been sued previously by three telecom companies who said he refused to pay them for services. Public documents show Massachusetts and California regulators took action against his companies for failing to file returns and provide other paperwork.
Brahmbhatt’s firms filed for bankruptcy in August. HPS has told clients—which include pensions and insurance firms—that it isn’t clear what, if any, money will be recovered, according to people familiar with the situation. The Federal Bureau of Investigation is now probing Brahmbhatt.
The rise of private credit—direct loans to companies made by private funds, rather than traditional banks—has given more companies access to the debt markets. But intense competition among lenders can create an environment where winning deals means taking greater risks.
It can be hard to understand how the investments private-credit funds make are performing because the companies they finance don’t publicly report earnings and their loans rarely trade. A publicly traded BlackRock fund that invests in private credit surprised investors when it disclosed a 19% write-down on its holdings recently, blaming poor performance in the fourth quarter.
Fears about fraud were triggered by the meltdowns in recent months of auto-parts supplier First Brands and auto-lender Tricolor. Those companies each filed for bankruptcy, as lenders leveled accusations that collateral for loans was misrepresented. Prosecutors recently accused First Brands founder Patrick James of fraud, charges which he denies. Tricolor’s former chief financial officer pleaded guilty to fraud charges in December, while other executives have disputed prosecutors’ allegations.
HPS’s dealings with Brahmbhatt came just as the frenzy for private-lending deals was being turbocharged in the early 2020s, said Daniel Zwirn, chief executive of alternative credit firm Arena Investors.
“Investors’ guard was at the lowest, the price competition was the fiercest and the rate of growth of the biggest firms was the highest,” Zwirn said. “It was the perfect setup for the worst combination of risk and reward.”
One HPS client said he was stunned by HPS’s investment in an allegedly fraudulent company because of its reputation as one of the gold-standard private-credit firms.
That reputation had reached its zenith by late 2024, when the firm was drawing takeover interest. Co-founders Scott Kapnick, Scot French and Michael Patterson, former Goldman Sachs bankers who left to found HPS in 2007, debated between going public or selling to a bigger firm. When their $12 billion sale to BlackRock closed on July 1, all three men were officially minted billionaires.
HPS co-founders Scott Kapnick, Scot French and Michael Patterson.
The loss on the Brahmbhatt loans represents a tiny fraction of HPS’s $179 billion in assets under management, but it is having a substantial impact on the two main funds that held it.
Some top executives in the financial world, including JPMorgan Chase CEO Jamie Dimon, have warned that more bad bets could come to light, especially if a downturn puts stress on high-risk borrowers. “When you see one cockroach, there are probably more,” Dimon told investors in October, referring to recent private-credit defaults. HPS’s problems with Brahmbhatt hadn’t yet been reported at the time.
Due diligence
Brahmbhatt, 57 years old, would seem an unlikely client for a highflying U.S. lender. He entered the telecom industry in 1980s India and by the early 2000s brought his business to the U.S., establishing offices on Long Island and in Queens, N.Y.
Court documents indicate he is a legal permanent resident of the U.S. In a 2017 interview, Brahmbhatt said his companies had around 450 employees in India and 20 in New York.
Brahmbhatt’s companies primarily engaged in what’s known as wholesale VoIP termination, the business of routing a high volume of phone calls to the correct destination over the internet, according to court records and their websites.
By the late 2010s, Brahmbhatt had started Carriox, a company meant to support his own and outside telecom companies. Carriox claimed to engage in “factoring,” the business of buying accounts receivable, or yet-be-paid invoices, from companies at a discount, court records show.
To acquire telecom company invoices at a large enough scale to profit, Brahmbhatt needed financing, which he initially secured from Texas-based private lender Crestline Investors, according to people familiar with the matter.
Brahmbhatt first approached HPS in 2020 seeking to refinance that loan, according to an HPS suit filed in Delaware chancery court last year. HPS’s investment team “conducted comprehensive due diligence in 2020 during the initial financing,” the complaint said.
HPS also relied on third-party experts including the accounting giant Deloitte for assurances, people familiar with the matter said. Deloitte didn’t respond to emails and phone calls seeking comment.
By the end of 2020, HPS had offered Brahmbhatt a large credit facility that provided his companies cash while they waited to collect on customer invoices. HPS upsized the loan facility twice and, with the help of French bank BNP Paribas, its investment grew to around $440 million.
Emails and invoices
HPS hired the accounting firm CBIZ to perform ongoing annual audits of collateral supplied by Brahmbhatt, according to people familiar with the matter.
Last summer, HPS for the first time asked CBIZ to provide the underlying communications it used to validate the invoices that served as collateral, according to court documents and one of the people familiar with the matter.
CBIZ directed an executive at Brahmbhatt’s Carriox to email telecom companies asking them to confirm invoice amounts—the money they supposedly owed Brahmbhatt’s firm—and copy CBIZ auditors.
As responses came in from the companies that were purportedly Brahmbhatt’s business partners, an HPS analyst noticed the fake email domains. HPS’s lawyers contacted the actual firms in question and quickly confirmed the lender had been duped.
“This is indeed a confirmed fraud attempt,” a security staffer at Belgian telecom company BICS wrote back on July 18. “We do not own the belgacomics.com domain name and have nothing to do with these emails.”
Meanwhile, HPS lawyers said, a review of contracts Brahmbhatt had provided auditors revealed what appeared to be forged signatures of customers.
HPS immediately sought answers from Brahmbhatt, who had been in India since June, he later told a judge in bankruptcy court. In a series of calls with HPS portfolio manager Jon Ashley, Brahmbhatt said he would get to the bottom of the invoice discrepancies, a person familiar with the conversations said.
Then he stopped picking up the phone, HPS alleged in court. The lenders found Brahmbhatt’s corporate offices in Garden City, N.Y., locked and empty when they visited on Aug. 4.
Brahmbhatt’s lawyer declined to answer any additional questions for this article, and Brahmbhatt didn’t respond to emails, phone calls and text messages seeking comment.
Red flags
Several aspects of Brahmbhatt’s companies should have drawn scrutiny by lenders, some due diligence experts said.
Broadband Telecom, one of Brahmbhatt’s companies, had its utility status suspended by Pennsylvania in 2017 after a commission review “showed an unacceptable history of compliance with Commission statutes and regulations.”
In three lawsuits—one in California and two in New York, all filed in 2018 or earlier—plaintiffs alleged Brahmbhatt or his companies used their services and then refused to pay. One plaintiff said Brahmbhatt’s company had less revenue than it claimed to. All the cases ended in settlements or moved to arbitration, according to court records.
Alejandro Silvestre, an industry executive, said his firm had helped Brahmbhatt’s Broadband Telecom route calls years ago but quickly concluded it wouldn’t be paid for those services.
“You have to be careful, because the industry is full of players who do deals, try to establish credit with providers, and then disappear,” Silvestre said.
Corners of the global telecom industry have been rife with fraud for decades, industry experts say. Internet phone wholesalers often operate across dozens of obscure international markets, and sell an intangible service—minutes of call traffic—that is easy to fudge on invoices and tax documents.
Modern software is highly effective at flagging spoofed emailed addresses, said Igor Zaks, the president of Tenzor, a due diligence consultant specializing in receivables finance. “Today there are many tools to detect the kind of fraud that occurred at Carriox,” he said.
Investment wipeout
In August, Brahmbhatt’s telecom companies and Carriox each filed for chapter 11 bankruptcy in New York.
Brahmbhatt filed for personal bankruptcy at the same time, citing “financial distress” stemming from lawsuits against him. The executive told a judge he had recently paid back a $4 million debt owed to a relative.
Assets in his personal bankruptcy filing include a primary residence in Long Island valued at around $2.7 million and an apartment in India. In 2024, Brahmbhatt earned $600,000, according to a September call with creditors in his personal bankruptcy.
Brahmbhatt appears to have been able to keep some of his businesses other than those directly involved in the invoice “factoring” out of reach of HPS so far.
HPS’s Asset Value Fund III, in which Carriox was a sizable early investment, was expected to return 11% net of fees over its lifetime, but now is expected to return 8% to 9%, assuming everything else in the fund performs as expected. A second fund that was expected to return 12% now expects to return in the 8% to 9% range, according to people familiar with the matter.
Affected clients include the San Joaquin County Employees’ Retirement Association in California, which had $34 million in one of the HPS funds as of the end of June. Officials there didn’t respond to requests for comment. The Virginia Retirement System had committed some $200 million to the affected HPS funds back in April, disclosures show. A VRS representative declined to comment.
HPS told investors last year it had written the entire investment down to zero to be conservative. “There are no recent material updates,” the company said in January in a quarterly update to investors.
Write to Jack Pitcher at jack.pitcher@wsj.com and Juliet Chung at Juliet.Chung@wsj.com