Calculating fund fees during the commitment period is usually easy for most private equity funds. Take the committed capital and multiply it by the applicable fee percentage. After the commitment period, the calculation often gets more complicated. Most funds have some reduction to actual capital deployed with deductions for write-downs and partial realizations.
Global Infrastructure Management got the calculation wrong for its funds. Part of the problem was an inconsistency between the funds’ PPMs and the funds’ partnership agreement in how to treat partial realizations. The PPMs stated the post-commitment management fee would be based on the capital contributions relating to the retained portion of investments. The partnership agreements said the fee would be calculated based on each limited partner’s capital contribution that was used to acquire an investment, and thus a partial disposition of the investment would not reduce management fees.
Global followed the partnership agreement and didn’t reduce the fee for partial dispositions. Unfortunately, Global employees appeared to have also told some investors that it would reduce and others that it wouldn’t.
It seems clear that the SEC view is that inconsistency works against the fund manager. The SEC made Global rebate fees back to investors based on the partial realization language in the PPMs. Fund managers need to prove that they are entitled to the fees and are may be cut short by inconsistent language.
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