PE Sponsor Charged Management Fees without Marking Down Portfolio Securities
A private equity sponsor agreed to pay over $1.2 Million for charging management fees based on over-valued portfolio securities. The manager was entitled to a 1.5% management fee based on the value of the portfolio securities, but the Limited Partnership Agreement required the manager to write down the values of certain securities based on designated triggering events. According to the SEC, the fund manager failed to use the lower values when calculating the management fees, thereby overcharging investors over $900,000 over a four-year period.
This is why ongoing fair valuation of portfolio securities matters to registered private equity sponsors. (The other reason is overly optimistic performance presentations and marketing.) We recommend that all private funds sponsors and their compli-pros read and understand ASC 820, which outlines how to value securities not traded on an exchange.