SEC turns up heat on fee ‘acceleration’

The Securities and Exchange Commission is continuing its crackdown on private equity firms charging “accelerated” monitoring fees.

Apollo Global Management is the latest firm to be charged by the US regulator for alleged undisclosed fee acceleration.

Portfolio companies pay their private equity owners an annual sum for ongoing management and advisory services, known as “monitoring fees.” Often these arrangements are structured as 10-year deals or longer. Typically an early exit from the company results in any unpaid monitoring fees “accelerating” to the private equity owner, even though the work no longer has to be performed.

Apollo has agreed to pay $52.7 million to settle the charges, which as well as covering accelerated monitoring fees, also included allegations of misleading limited partners in four funds about fees and a loan agreement, and for failing to supervise a senior partner who charged personal expenses to several funds.

Speaking about the charges against Apollo, Andrew Ceresney, director of the SEC Enforcement Division said that “a common theme in the regulators recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors”.

“Investors in Apollo funds were not adequately informed about accelerated monitoring fees and separately allocated loan interest, and therefore were unable to gauge their impact on their investments,” said Ceresney.

A spokesperson for Apollo said that “the SEC acknowledges that Apollo was transparent with its limited partners about such fees in other documents. In fact, during the period at issue, Apollo disclosed each accelerated fee in detailed schedules provided on a regular basis to each fund’s limited partner advisory committee.”

“Despite the lack of specific disclosure in the original limited partnership agreements, the disclosure concerning the nature of fees that might be charged was extremely broad,” he added.

Last year, Blackstone Group agreed to settle charges and pay $39 million to the SEC for failing to disclose to its funds and LPs at the outset that it might accelerate future monitoring fees when certain monitoring of portfolio companies ended, according to the SEC.

The overall goal of the SEC enforcement, according to Ceresney, is to increase the transparency levels in private equity and cause tangible changes for the investors’ benefit. For example, after settling its case with the SEC, Blackstone altered its practice to stop taking accelerated monitoring fees when it exits a portfolio company.

“It is my belief that awareness and transparency of fees generally will lead investors and advisors to reach an appropriate balance in terms of types and allocation of fees,” said Ceresney.

The SEC has also requested information about The Carlyle Group’s historical monitoring fee acceleration practices, according to the private equity firm’s earnings 2015 report filed with the SEC in February, as previously reported by sister publication pfm.