A majority of private-equity firms inflate fees and expenses charged to companies in which they hold stakes, according to an internal review by the U.S. Securities and Exchange Commission, raising the prospect of a wave of sanctions by the agency.
More than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors, according to a person with knowledge of the SEC’s findings who asked not to be named because the results aren’t public. While some of the problems appear to have resulted from error, some may have been deliberate, the person said.
The SEC’s review of the $3.5 trillion private-equity industry began after the 2010 Dodd-Frank Act authorized greater oversight of money managers, putting many firms under the agency’s scrutiny for the first time. By December 2012, examiners had found that some advisors were miscalculating fees, improperly collecting money from companies in their portfolio and using the fund’s assets to cover their own expenses.
“A lot of the practices, in the eyes of the SEC, raise conflicts,” said Barry Barbash, co-head of the asset-management group at Willkie Farr & Gallagher LLP in Washington. “The SEC wants those conflicts aired out and wants certain practices ultimately changed, and I’m sure we’re going to see it.”
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John Nester, an SEC spokesman, declined to comment on the exams.
Private-equity firms buy companies using a combination of investor capital and debt, with the goal of selling them or taking them public for a profit. They typically charge annual management fees of 1.5% to 2% of committed funds and keep 15% to 20% of profit from investments, known as carried interest. Most buyout firms also charge fees to the companies they acquire to help cover costs related to the deals or restructuring, often sharing some of the proceeds with their investors.