Disclosures by Buyout Firms Show Improvement: A Win for SEC
The Securities and Exchange Commission’s (SEC.TO) authority and consistent efforts seem to be paying off. The U.S. regulator noticed increased updates concerning fees as well as expenses charged on public pension funds and other clients in regulatory filings by the buyout firms.
These firms are now taking care to maintain a reasonable level of transparency in their disclosures along with ensuring clear communication with fund investors to stay in the good books of the SEC.
Enhanced Disclosure Initiatives
Members of Private Equity Growth Capital Council include large buyout firms like Carlyle Group LP (CG), Apollo Global Management, LLC (APO) and Kohlberg Kravis Roberts & Co. L.P. (KKR). Many of these big firms along with Sun Capital Partners Inc. and Thoma Bravo LLC have come forward and made early revisions in disclosures, which are usually released in the annually filed documents.
These companies revealed in the filings that they charge hefty fees in the form of monitoring fee accelerations for undelivered services.
Moreover, many firms are now clearly mentioning the cost allocation process associated with the operating partners. Private equity firms frequently use the expert services of operating partners for handling portfolio companies. There has always been an ambiguity regarding operating partners over their relationship with the firms.
Advent International Corporation, in its revised Form ADV, stated that operating partners were treated as independent consultants rather than employees of the firm and fees and other compensation paid to them were indirectly borne by investors.
Other revised ADV disclosures included the revelation of fees shared with and held back from the fund investors, which these firms receive from the portfolio companies acquired on behalf of investors.
Further, Kohlberg Kravis disclosed that it received rebate for introducing the portfolio companies to group-purchasing programs and also holds the facility to exploit the group-purchasing discounts for its own benefit.
SEC vs Buyout Firms
The $3.5 trillion private equity industry managed to evade the SEC for around 30 years with their opaque and complex organizational structures. The financial crisis of 2008, however, changed everything. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010, which in turn empowered the SEC against the private equity firms by making it mandatory for firms worth $150 million or more to register with the SEC.
This helped the U.S. regulator to keep a close watch on these firms. Scrutiny of more than 150 private equity firms since 2012 detected compliance shortfalls and violations of law in over half of the firms. The SEC believes that eradicating the inherent lack of transparency in disclosures by the private equity firms will help protect investors’ interests.
Further, the SEC’s efforts to uncover the hidden fees charged by these firms caught on with the investors as well. They started questioning the levels of disclosure regarding fees, allocation of fees and so on. This due diligence on part of both investors and SEC resulted in the forgoing of additional consulting fees by a leading buyout firm, The Blackstone Group L.P. (BX).
Read the Full Research Report on BX
Read the Full Research Report on KKR
Read the Full Research Report on APO
Read the Full Research Report on CG
Zacks Investment Research
