SEC Brings Another Private Equity Fund Fee Case

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Apollo has been variously recognized as a god of sun, truth, healing, and poetry, and more in classical Greek and Roman mythology. It’s namesake private equity firm has settled charges with the Securities and Exchange Commission that it was less than truthful in disclosing fees charged to investors.

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The main thrust of the Apollo case was over monitoring fees. Apollo, like many private equity firms, charged a monitoring fee to its portfolio companies. The SEC has previously announced its distaste for these fees, especially when the fees relate to periods after the sale of the portfolio company.

Apollo disclosed in its fund documents that it charge monitoring fees. The SEC felt that Apollo did not adequately disclose that sometimes these fees would be accelerated upon the sale of a company and therefore earn a fee for period where there was no company to monitor.

I believe this practice has largely stopped in the private equity world or the disclosure is now more robust regarding this standard industry practice.

Regardless, it was a big chunk of change. The order lists $37 million of disgorgement.

In addition to its distaste of monitoring fees, the SEC did not like a loan from the funds to the management company. It’s not clear from the order what was going on with the loan, but it looked like a vehicle to defer taxes on carried interest. The fatal flaw for the SEC was that the accrued interest on the loan was allocated to the fund’s GP which was not fully disclosed in the financial statements.

Lastly, one of Apollo’s senior partners charged personal items to the funds in violation of the Apollo’s policies. This conduct was repeated. Apollo ended up firing the partner and making him (or her) repay the expenses. Apollo self-reported this to the SEC.

But still the SEC decided to include that expense infraction in this order.

Private fund compliance professionals have been focusing on fees and expenses. To me the monitoring fee is a leftover from a few years ago when the SEC announced its distaste for the practice. It’s not clear to me what impact the loan had on the fund investors.

Clearly, the fund investors were made whole by the malfeasance of the senior partner. Apollo did everything right in that context, including self-reporting. I’m not sure why the latter item had to be part of a big, public enforcement action.

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Author: Doug Cornelius

You can find out more about Doug on the About Doug page

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