Tag: Camelot Acquisitions Secondary Opportunities Management

Fees, Expenses and the S.E.C.

money penny

Andrew Bowden threw a grenade at the private fund industry three weeks ago when he spoke at PEI’s Private Fund Compliance Forum. He said that the SEC found violations of law or material weaknesses in over 50% of the exams they had conducted of private equity funds when it came to fees and expenses.

Mr. Bowden pointed to two particular types of fees and expenses: monitoring fees and operating partners. Although both of these are customary in private equity deal and disclosed in PPMs and financial statements, the SEC does not like them. He lumped them together with fraudulent expenses in the Camelot case.

Two recent news stories are carrying on Bowden’s view of private equity.

Last week, the Wall Street Journal ran a story on how KKR failed to credit certain fees back to investors because the unit was not an affiliate:  KKR Error Raises Question: What Cash Should Go to Investors? KKR is required to share with investors in its largest buyout fund 80% of any “consulting fees” collected by any KKR “affiliate.” The unit in question was owned by KKR’s management and not considered an affiliate. The article specifically tied back to Mr. Bowden’s speech.

On Sunday, Gretchen Morgenson penned an article in the New York Times about monitoring fees: The Deal’s Done. But Not the Fees. The article highlighted $30 million in monitoring fees paid to Goldman Sachs, Kohlberg Kravis Roberts and TPG Capital for their oversight of Biomet. The unpaid fees under the 10-year monitoring contract became due on the sale to Zimmer Holdings. This article also specifically mentions Mr. Bowden’s speech.

In my view, it’s not that the fees are illegal or “fraudulent, manipulative or deceptive” under Section 206. It’s a matter of disclosure to investors and internal procedure. Investors deserve a right to know the fees they are paying, either directly through the fees by the fund, or indirectly by the fees paid by the portfolio company to the fund manager. Perhaps in some fund documents the fees can be laid out in more detail. Fund managers should have internal procedures for how fees are implemented and checked to make sure they comply with the fund documents.

Personally, I think Mr. Bowden is lumping a lot of customary fees and expenses into his 50% bucket. I’m offended that he is including the case of fraud, like the Camelot case, in with instances of fees that the SEC merely does not like.

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Private Fund Theft Through Diligence Payments

camelot and compliance

The Securities and Exchange Commission charged Lawrence E. Penn III and his firm Camelot Acquisitions Secondary Opportunities Management, a private equity manager, with stealing $9 million from investors in their private equity fund. He is accused of siphoning off $9.3 million through sham due diligence payments.

The SEC claims that Penn used a shell company to funnel due diligence expense payments from the private equity funds. That money was then transferred to Penn and Camelot. Penn and Camelot are merely charged so we can only see the issue through the SEC’s eyes. Since it was a private equity fund, the story caught my eye.

Camelot’s audit firm could not obtain satisfactory evidence that certain due diligence payments were legitimate. The fund only paid millions in due diligence expenses to a firm called Ssecurion. But no other firm for due diligence.That;s strange for a firm to be using a single diligence provider given the many areas of diligence required for private equity investments.

Another red flag should have been the cost. I think $9 million is a big expense item for a fund with about $175 million AUM.

The audit firm kept poking and Camelot produced generic looking materials that could be found on the internet. None were branded or had any indication that they came from Ssecurion. The audit firm was worried and didn’t have any credible evidence that the costs were legitimate.

The audit firm reported the matter to the Securities and Exchange Commission.  The SEC’s Office of Compliance and Inspections and Examinations initiated a for-cause exam. Camelot failed to produce requested books and records and Penn failed to show up for several meetings. As a result, OCIE could not complete the examination and handed the case over to enforcement.

Camelot’s Form ADV Part 2 states Deloitte and Touche terminated the audit relationship during the summer of 2013. Deloitte disowns prior financial statements and did not prepare a report for 2012.

It sounds like a great job by Deloitte reporting the problem. Except it took the firm a few years and a few audits to uncover the problem. Alleged problem. Penn and Camelot have not responded to the charges.

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Gustave Doré’s illustration of Lord Alfred Tennyson’s “Idylls of the King”, 1868