Fees no surprises please

Some of the world’s largest private equity investors have sent lengthy questionnaires to their GPs in the last few weeks seeking clarifications on fees and expenses, as the fallout continues from a now-notorious speech by the Securities and Exchange Commission.

The so-called ‘Sunshine Statement’, delivered by Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, at Private Equity International’s Private Fund Compliance Forum in New York in May, has sparked a wave of disclosure demands across the global industry.

Bowden, whose team have examined more than 150 newly SEC-registered private equity advisers, flagged serious concerns about the collection of fees and allocation of expenses between managers and the funds for which they are responsible. He said: “When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law, or material weaknesses in controls, over 50 percent of the time.”

Industry sources say the SEC has since been relatively aggressive in trying to get people to pay money back. One US lawyer advising general partners says: “They are asking one of my clients to pay back tens of millions of dollars, despite there being a partnership agreement in place that allowed for the charges, and despite enhanced disclosure having been made.”

Some limited partners have used the Sunshine Statement as a rationale to send lengthy disclosure requests to their managers, asking them to explain the precise nature and quantum of their fees and expenses, with reference to the LP agreement signed at the outset of the fund. They have also demanded to know whether the SEC has examined the manager in question, and if so, what the regulator concluded about the policies in place. More requests are likely to follow.


Since the Dodd-Frank Act required that private equity funds register with the SEC, investment advisers have had to complete Form ADV. Part two of that form is primarily for client use: acting as a sort of brochure, it contains information such as the types of advisory services offered, the advisor’s fee schedule, and the educational and business backgrounds of both management and key advisory personnel of the adviser. Here, again, change is afoot.

“We are seeing people now making additional disclosures on and revisions to their Form ADV part twos, making sure everybody understands the way things work,” says another private equity lawyer.

One of the main issues highlighted by Bowden in terms of expenses related to GP’s use of operating partners, particularly for those firms whose network of operators provide services to portfolio companies that are paid for by the funds. Since these consultants will look and act like other employees of the general partner, and usually work exclusively for that GP, it does raise the question of why they are paid for by the fund rather than the manager.

In his speech, Bowden said: “In some egregious instances, we’ve observed individuals presented to investors as employees of the adviser during the fundraising stage, who have subsequently been terminated and hired back as so-called consultants by the funds or portfolio companies.”

Other expenses that have come under the spotlight have included legal, compliance and accounting costs – which investors may have assumed should be borne by the managers, only to find they are in fact borne by the fund.

One London-based private equity lawyer says: “We acted for one GP who has an in-house legal team and charges legal fees to the fund for their team working on deals. But it was all declared in the limited partnership agreement. And it was more cost-effective for the LPs to pay for the legal services that way.”

Another lawyer says: “I had one case where travel expenses were being recharged to the fund. The investors thought that travel expenses should be part of the overhead of the manager.”

Then there are fees that may be charged to investors without adequate disclosure, such as monitoring fees charged to portfolio companies for ongoing board and management services, or administrative/transaction fees.