Half of GPs lack oversight on fund fees

Despite SEC expectations, a significant percentage of GPs do not formally review their expense allocation policies, PE Manager has exclusively learned.

Half of private equity firms do not have formal policies in place to ensure that only reasonable expenses are charged to Limited Partners, according to ACA Compliance Group research seen exclusively by PE Manager ahead of a wider release.

Last week, PEM reported that an increasing number of investors were becoming concerned about GPs billing the investment fund for private jet travel and other questionable expenses. 

“Written expense allocation policies and procedures establish controls to ensure that firms are allocating expenses consistently with their fund document disclosures, and that the allocation among multiple funds between the management company and funds is reasonable,” said Jack Rader, an ACA compliance consultant.

The findings come at a time when the US Securities and Exchange Commission (SEC) is probing how private equity firms – which fell under the regulator’s spotlight last year as part of the Dodd-Frank financial reform bill – share various expenses like private jet air travel and due diligence costs with investors. SEC officials have consistently warned that expenses charged to investment funds should be clearly disclosed to investors. 

Having a written expense allocation policy is an “expectation of the SEC and a good practice,” said Rader.

While most GPs do not have formal expense allocation controls in place, 66 percent of private equity firms include expense allocation guidelines in their limited partnership agreements and other fund governing documents, ACA research found. However most GPs said they do not subject these guidelines to any “reasonableness” review by outside consultants or employees using their own good judgement. 

Researchers surveyed approximately 60 private equity firms, the majority of which operated in the US. 

Other research highlights include:

· 30 percent of private equity firms charge all costs of private jet travel to the fund while 35 percent charge a first class ticket equivalent when jet setting. 

· 43 percent of GPs require the investment process to progress to a certain point before the firm is able to allocate dead deal expenses to the funds. 

· 18 percent of private equity managers said they disclose expenses to LP advisory boards.

· 38 percent of GPs have the fund pay for annual limited partner meeting expenses.

· 86 percent of private equity firms eat Form PF expenses at the management level. 

An in-depth look into how GPs and LPs (and their lawyers) are discussing who pays for various legal and compliance costs will be featured in the October edition of PE Manager.