Disclosing Private Fund Expenses to Investors – You Can’t Fix it With Form ADV

Private Fund CCOs have been focused on the disclosure and reporting of fund expenses for years. The Securities and Exchange Commission made it a centerpiece of exams of private fund managers. A handful of cases came out in 2015-2016 on that first wave of private equity fund manager exams:

  • Blackstone failed to fully inform investors about benefits it received from accelerated monitoring fees.
  • Apollo failed to adequately disclose the acceleration of monitoring fees upon the sale or initial public offering of portfolio companies.
  • WL Ross failed to disclose to funds and their investors certain fee allocation practices that resulted in the funds paying the manager approximately additional, undisclosed management fees.
  • First Reserve failed to disclose conflicts of interest related to fees and expenses charged to funds under its management, and other undisclosed benefits.

Last month, TPG Capital was the latest firm to fall under the wrath of the SEC for what the SEC decided was inadequate disclosure on fees. The focus was on acceleration of portfolio company monitoring fees.  The SEC has stated that it does not like these fees unless they are fully disclosed.

TPG charges each of its portfolio companies an annual fee in exchange for rendering a consulting and advisory services. These monitoring fees paid by each Portfolio Company to TPG are in addition to the annual management fee paid by the Funds’ limited partners to TPG. However, a certain percentage of the monitoring fees are used to offset a portion of the annual management fees that the Funds’ limited partners would otherwise pay to TPG. The standard agreement for the monitoring fee was for 10 years, with full acceleration on the sale of the company.

The SEC acknowledge that TPG disclosed its ability to collect monitoring fees to the Funds’ limited partners prior to their commitment of capital, it did not disclose its receipt of accelerated monitoring fees in the PPMs and LPAs. TPG did make fee disclosures LPAC reports, portfolio company Form S-1 filings, and TPG’s Form ADV. But the SEC took the position that by the time these disclosures were made, the limited partners had already committed capital to the Funds.

One point that had been rolling around compliance circles was how to remedy fund documents for legacy funds that did provide the level of detail on fees and expenses that the SEC now seems to require. One method was to make the disclosure in the ADV Part 2 Brochure. This case seems to blow-up that tactic.

Regardless, it would seem as a result of this action, TPG’s Form ADV Part 2 Brochure has one of the lengthiest and most detailed fee disclosure I have seen.