A private equity manager was barred from the industry and agreed to pay a $1.25 Million fine for taking £16.25 Million in unauthorized fees. The respondents also agreed to reimburse the funds over $24 Million. According to the SEC, the respondent, in its capacity as GP, invoiced the funds for real estate workout fees pursuant to an oral agreement it made with an affiliate. The SEC asserts that the respondents needed additional cash because the financial crisis reduced their fees and increased their workload and expenses, but the LP advisory committee refused. The SEC asserts that the purported agreement with the affiliate was never disclosed to the LPs or the auditors. When the LPs objected to the additional fees, the respondent sued the limited partners but ultimately agreed to reimburse the funds after the SEC’s investigation commenced.
OUR TAKE: Way back when (before Dodd-Frank?), a GP may have had unfettered power to engage in conflicts of interest and assess undisclosed fees. As a fiduciary under the Advisers Act, private equity GPs must seek approval for additional fees and fully disclose all potential conflicts. Otherwise, they won’t be a GP for long.