Private Equity Firm Failed to Allocate Overhead Expenses to Co-Investment Funds
A real estate private equity fund sponsor paid $3 Million to reimburse investors and agreed to a $350,000 fine for failing to allocate overhead expenses to co-investment funds. The fund manager was entitled to payment for services such as due diligence, accounting, valuation, and legal upon approval by the LP committee. The SEC alleges that the fund sponsor, over a 6-year period, over-allocated expenses to the third party funds by failing to allocate to the co-invest funds. The SEC further faults the firm for charging a flat 25% overhead charge rather than justifying the expenses based on market rates.
As the adage goes, sometimes when you’re too sharp, you may end up cutting yourself. This firm, which has more than $4.5 Billion in asset under management, overreached to collect an extra $3 Million over 6 years ($500,000 per year on average). That’s a lot of money but small returns as compared to the costs of this action including defense costs, the fine, additional compliance costs, and the reputational damage. The firm should have been on notice as the SEC has brought several expense mis-allocation cases against PE firms.