The US Securities and Exchange Commission (SEC) recently asked The Blackstone Group for additional information regarding its historical monitoring fee termination practices, according to the firm’s quarterly report filed with the SEC on Friday.
The SEC reviewed the firm’s historical monitoring fee practices in 2011 and 2012 in their regular exam process, the report stated. Following the exam, Blackstone expanded its disclosure to private equity investors regarding fees. Then in June 2014, the firm voluntarily modified its monitoring fee practices, including eliminating any payments beyond the year of sale for full dispositions and limiting payments following IPOs.
The SEC has asked for additional information about certain pre-2011 practices relating to the “application of disparate vendor discounts to Blackstone and [to its] funds that were changed in 2011 and had been previously reviewed by the SEC in 2012,” according to the report. A spokesperson for Blackstone was not available for further comment.
Blackstone is currently “in discussions” with the regulator regarding a potential resolution of the matter, the report stated.
Portfolio companies pay their private equity owners an annual sum for ongoing management and advisory services, known as “monitoring fees.” Often these arrangements are structured as ten-year deals or longer. Typically an early exit from the company results in any unpaid monitoring fees “accelerating” to the private equity owner, even though the work no longer has to be performed.
Last year at the PEI Private Fund Compliance Forum, former chief SEC inspector Drew Bowden challenged the practice saying, “There is usually no disclosure of this practice at the point when these monitoring agreements are signed, and the disclosure that does exist when the accelerations are triggered is usually too little too late.”
During an earnings call in February, Blackstone made note of further changes to its monitoring fee policy, stating that it would be sharing 100 percent of any monitoring or deal fees with LPs in Blackstone Capital Partners Fund VII, a fund currently in market targeting at least $16 billion.
Under the new fee offset structure, the GP will use 100 percent of any fees it collects for closing an acquisition or for monitoring existing portfolio companies to pay down its investors’ management fees.
On the media call, Blackstone president Tony James denied that the altered structure was a response to queries from regulators. “This has nothing to do with the SEC, it’s just the economics of the business,” James said.