A private equity firm agreed to pay over $1.9 Million for failing to fully disclose and seek approval for charging portfolio companies for providing certain operating support services over a 4-year period. In addition to the 2%/20% fee charged to its funds, the PE firm charged portfolio companies an additional hourly rate for performing certain business improvement services in the “ordinary course of business.” According to the SEC, such payments represented over 13% of the firm’s revenue. The SEC faults the firm for failing to (i) fully disclose that it charged the portfolio companies and (ii) obtain informed consent from the independent limited partners.
PE firms should include all fees and payments in the management fee or carry. Trying to nickel and dime the funds or the portfolio companies will lead the SEC (and investors) to question disclosure and consent requirements and inquire whether the firm engaged in opaque conflicts of interest.