Private equity firms reviewing expenses policies
An increasing number of private equity firms are modifying their expenses policies amid growing investor and regulatory scrutiny over the charges they are incurring to their clients.
This comes following the Securities and Exchange Commission’s (SEC) high-profile clampdown on what it viewed as erroneous expenses being charged by private equity houses. These included fees or levies imposed on limited partners for the fees charged by directors or operations professionals they put into companies, sometimes without proper disclosure in legal documents.
“The SEC identified that there were a lot of fees and additional sources of income being offset by fund managers that investors were not aware of. While the regulator acknowledged that this is perfectly acceptable if the private equity manager has outlined these charges in their legal documentations, it is not satisfactory if there are expenses that have not been agreed with limited partners in the legal documents,” said Ian Kelly, Group Chief Executive of Augentius, a private equity and real estate fund administrator.
Ernst & Young’s (EY) 2015 Global Private Equity survey found 59 per cent of private equity houses had not modified their expenses procedures, policies or documentation over the last two years. In May 2014, Andrew Bowden, the outgoing director of the SEC’s Office of Compliance Inspections and Examinations delivered a speech whereby he said examiners noted there were law breaches or material weaknesses in private equity controls during 50 per cent of examinations.
“Most private equity funds are hard closed, and have been so for more than two years, – and unless they are fund raising, they are unlikely to re-write documentation. However, the majority of new private equity fund investments are subject to fee and expense negotiations. Investors are looking long and hard at the charging clauses before making an investment,” commented Kelly.
Despite issues around fees, private equity remains one of the most popular alternative asset classes. A survey by Preqin found that 57 per cent of private equity firms reported an increase in investor appetite compared with just 12 per cent who said there had been a decrease. Nonetheless, fundraising was cited as biggest challenge facing the industry by 37 per cent of respondents to the Preqin study.