From 2008 to 2014, the largest four private equity fund general partners collectively earned $16.5 billion of carried interest and $10.8 billion of management fees, both standard charges, as well as $2.5 billion of fees labeled “net monitoring and transaction fees.”

The latter fees are not well documented, and are contentious because they are charged by GPs to companies whose board they control, according to new research from the University of Oxford’s Saïd Business School.

In what the researchers called a first draft of a paper published Nov. 25, they said these hidden fees represented 3.6% of all earnings before interest, tax, debt and amortization of the companies they examined over 20 years, or $20 billion.

“It was odd for us to read that it is quite common for board members to claim various expenses and consulting fees to a company that they supervise,” Ludovic Phalippou, the paper’s lead author, said in a statement.

 “We decided to have a close and systematic look into this.”

The researchers based their findings on examination of 25,000 pages of relevant Securities and Exchange Commission filings between 1990 and 2014 that covered 1,044 GP investments in 592 leveraged buyout transactions, whose total enterprise values, including add-on acquisitions, amounted to $1.1 trillion.

According to the paper, the monitoring and transaction fees were not related to business cycles or credit cycles or to company characteristics.

In July, it said, 13 state and city treasurers asked the SEC to require private equity firms to reveal all of the fees they charge investors.

In October, the agency said it would “continue taking action against advisors that do not adequately disclose their fees and expenses” following a settlement by Blackstone for $39 million over accelerated monitoring fee issues.

The paper said that when these fees became news and were subject to SEC investigations, firms charging the least raised significantly more capital than they did before the financial crisis.

“People speculated over the summer that these fees could be a tax evasion scheme,” Phalippou said.

“But we are skeptical of this explanation because we found that half of the companies pay no corporate taxes, even before these fees are charged and the fees are not sensitive to the earnings before tax of a company.’

During the 2008 financial crisis, providers of capital complained about these fees, prompting many general partners to announce 100% refunds of these fees going forward, according to the paper.

The researchers said they wondered whether the fees appeared just before onset of the crisis and disappeared right after.

They said that at best 85% of these fees were rebated on average across GPs in the 2011 to 2014 period, and even when a refund of 100% was mentioned, the effective refund could be less because restrictions and other complications in the calculations could effectively reduce the rebated amount.

Management service agreements contained more than just transaction fee and monitoring fee payment schedules, they said. These agreements waived several GP fiduciary duties, allowing GPs to claim a wide-ranging and somewhat discretionary set of expenses. The researchers wrote that although accelerated monitoring fees had attracted the most regulatory and media attention, their findings showed that they were basically charged only by companies going public and at the time of the initial public offering.  

“If monitoring fees are accepted practice, then it is difficult to see why a fee charged at the time of the IPO which covers the monitoring of the general partner would not be accepted.”

Phalippou said the findings suggested the SEC may need to review its current approach.

He said the practices were either legal or not, and if deemed illegal, the SEC should hit big offenders with large fines.

According to the paper, however, “the magnitudes of the SEC fines so far are not commensurate with the amount of fees we document here and that GPs that have been fined are not those charging the most.

“Also, expenses charged by GPs to portfolio companies may present the largest potential for conflicts of interest. We do not have data to analyze expenses or potential kick-back arrangements but it would be a natural follow-up study.”

The researchers invited comments on this paper.

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