Years ago we had heard that the Securities and Exchange Commission was looking at issues related to group purchasing agreements with private equity portfolio companies. A case has been announced.
The SEC brought action against WCAS Management which runs the Welsh, Carson, Anderson & Stowe private equity funds.
According to the order, WCAS entered into an agreement with an unidentified group purchasing organization. That organization aggregates companies’ spending to obtain volume discounts from participating vendors. Presumably this would save money for the portfolio companies owned by the private equity funds.
Under the agreement with the Group Purchasing Organization, it paid compensation to WCAS based on a share of the fees the GPO received from vendors as a result of the WCAS portfolio companies’ purchases through the GPO.
That is extra income coming to WCAS indirectly from the portfolio companies. WCAS could have prorated the fee and sent it back to the portfolio companies. But it didn’t.
WCAS could keep the fee income if that was the deal with investors. The SEC claims that WCAS did not disclose the agreement, the fee income it generated and the conflicts of interest associated with the agreement. The fee earned by WCAS was $623,035.
The administrative order fails to point out whether the net savings to portfolio companies was more or less than that fee paid to WCAS. If the savings was less, then that looks bad for WCAS. WCAS is better off and the portfolio companies are wore off.
If the savings was greater, then I’m not sure I would hear the investors complaining. They were coming out ahead on a net basis. Yes, WCAS was getting additional income. But the portfolio companies would be paying less on a net basis.
But WCAS was also coming out ahead without disclosing the additional income stream. That was the problem.
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