Investor Base LPs strike back

In May, the Oregon Investment Council said it would be taking a hard look at the fees charged by its investment managers, to ensure that the state had not been paying out more than its fair share.

“We have directed our consultants and treasury staff to continue to verify that the private equity firms with whom we invest have assessed only those fees allowed by the terms and conditions of their contracts,” Richard Solomon, chairman of the Oregon Investment Council, said in a statement.

The announcement followed reports that about half of the 150 or so newly-registered private equity groups examined by the SEC so far had exhibited “violations of law or material weaknesses in controls” with regard to fee allocations.

In a speech at Private Equity International’s Private Fund Compliance Forum in New York in May, Andrew Bowden, chief inspector of the US Securities and Exchange Commission, unveiled a laundry list of questionable fund expenses common in the industry.

Operating partners portrayed as employees of the management firm but who are actually compensated by the fund or portfolio company are one of the most common deficiencies found during pre-sence exams, Bowden said.

“Since these professionals are presented as full members of the adviser’s team, investors often do not realize that they are paying for them a la carte, in addition to the management fee and carried interest,” said Bowden. This allows GPs to grab a marketing advantage by showcasing in-demand operating professionals, without having to foot the entire bill for their services, he said.

SEC examiner Nina Freedman also clarified how the regulatory body defines “hidden fees” during a panel at the Association for Corporate Growth’s Intergrowth 2014 conference in Las Vegas in April, suggesting it usually referred to the way certain expenses were offset against management fees.

“Usually it’s negotiated where some percentage can be offset against management fees,” Freedman said. “So we’re going to want to follow that money coming in and understand the proper offset they calculated to those management fees.”

The SEC has nearly completed its sweep of the industry that began in the fall of 2012. Once it starts publishing some evidence of misbehaviour, Oregon won’t be the only LP scrutinising its bills.