A private equity firm agreed to pay over $6.5 Million in disgorgement, interest and fines for failing to adequately disclose, before commitment of capital, that it would receive accelerated portfolio consulting fees upon IPO or sale of the applicable portfolio company. The PE firm did disclose in the Limited Partnership Agreement that it received portfolio consulting services and disclosed in its Form ADV that it received accelerated fees. Fees were also described in the funds’ annual reports and in a side letter for one of the funds. Also, the PE firm credited a large percentage of the accelerated fees against future management fees. However, the SEC faults the firm for neglecting to inform all limited partners before committing capital that it would accelerate portfolio consulting/advisory fees upon IPO or sale for based on the present value of contract fees that could extend up to 10 years. The SEC asserts that only the limited partnership committee could approve these potentially conflicted transactions.
OUR TAKE: The SEC has brought several cases charging PE firms with taking various forms of ancillary fees (e.g. portfolio monitoring, broken deal expenses, overhead expenses). PE firms should reconsider these ancillary fees in favor of a more inclusive management fee.