The SEC entered into an agreed settlement with a private equity group for receiving accelerated fees without the consent of all necessary parties prior to the commitment of capital. The SEC alleged the private equity group typically entered into agreements with portfolio companies, pursuant to which it received periodic fees in exchange for performing consulting and advisory services for the portfolio companies. Upon the initial public offering or sale of the portfolio companies, certain of the private equity group’s agreements with the portfolio companies terminated automatically, and the private equity group received an accelerated, lump sum payment of the fees that would have been payable to it for providing services for the remaining term of the agreement. Between 2013 and 2015, the private equity group received accelerated fees upon the early termination of portfolio company agreements in five instances, one upon the sale of a portfolio company and four upon initial public offerings of portfolio companies.
According to the SEC, the private equity group disclosed in the funds’ governing documents that it may enter into consulting agreements with portfolio companies and receive consulting fees from portfolio companies, a majority percentage of which would be shared with the funds’ limited partners in the form of management fee credits, while the private equity group kept the remainder of the fees. Additionally, as to one fund, the private equity group entered into binding side letter agreements that contained a provision stating “[f]or the avoidance of doubt” that the private equity group may receive fees upon the sale or IPO of portfolio companies, which the private equity group also credited against management fees. The private equity group provided notice of the side letter provision to more than three quarters, but not all, of the fund’s limited partners. The private equity group also disclosed, in semi-annual financial reports provided to all limited partners, the amount of periodic and accelerated fees and the shared and retained portions, and portfolio companies disclosed the accelerated fees in Commission filings in connection with their IPOs or, in the case of one company, sale.
Nevertheless, and despite the robust disclosure, the SEC said the private equity group did not adequately disclose to the funds, their advisory committees, or all the funds’ limited partners, prior to their commitment of capital, that the private equity group may receive accelerated fees upon the early termination of portfolio company agreements. Among other things, the SEC found that by engaging in a practice of negotiating and receiving accelerated fees from portfolio companies without adequately disclosing this practice to all of the funds’ limited partners prior to their commitment of capital, certain statements by the private equity fund to the funds’ limited partners were made misleading, and thus the private equity group negligently violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.
The private equity group did not admit or deny the SEC’s findings.