When the Securities and Exchange Commission announced last year that it was not happy with the fees private equity funds were charging and how they were disclosed (or not disclosed) to investors, we expected enforcement cases to follow. They are here. The latest is against Fenway Partners for failing to disclose conflicts of interest to a fund client and investors when fund and portfolio company assets were used for payments to former firm employees and an affiliated entity.
According to the SEC order, Fenway had management service agreements with the portfolio companies which were partially offset against the fund management fee charged to investors.
In 2011, Fenway cancelled those agreements and entered into similar agreements with a new consultant firm largely owned and operated by the principals of Fenway. Fenway did not offset these consulting fees against the fund management fee.
The SEC found several faults with the change. The SEC found the disclosure to the fund’s advisory board to be lacking in detail. The SEC also challenged the fund’s financial statements for failing to be GAAP compliant and disclose the payments to affiliates, the new Fenway consultant firm.
I assume Fenway was taking the position that the new consultant firm did not meet the definition of “affiliate” under the fund documents and could be carved out separately. Clearly, the SEC does not like this approach. KKR was challenged on taking this position last year by the SEC.
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