The US Securities and Exchange Commission has charged US venture giant Insight Partners for allegedly overcharging fees and failing to disclose a fee calculation conflict. Insight Venture Management has agreed to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest, which has already been paid back to the impacted funds, per a statement from the regulator.
The SEC alleged that Insight’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on invested capital in individual portfolio investments, which would be reduced if Insight determined that one of these assets had suffered a permanent impairment. The regulator said that from August 2017 through April 2021, Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level.
It also alleged that, because Insight did not disclose its permanent impairment criteria, investors were unaware that the criteria Insight used were narrow and subjective, making them difficult to satisfy.
Spokespeople for Insight Partners did not respond to a request for comment at the time of publication.
Insight ranked first on Venture Capital Journal‘s annual VCJ 50 ranking of the 50 largest venture fundraisers. For the period of 2017 to 2021, the firm raised two flagship funds: Insight Venture Partners X, which closed on $6.31 billion in July 2018, and Insight Venture Partners XI, which closed on $9.54 billion in April 2020.
Among the largest investors in Fund X are the California Public Employees’ Retirement System, which committed $300 million, New York State Common Retirement Fund ($250 million) and CPP Investments ($200 million). The three investors are also among the largest LPs for Fund XI, with CalPERS committing $400 million and New York Common and CPP each committing $250 million.
Fund X generated a DPI multiple of .42x, TVPI multiple of 2.43x and IRR of 31.41 percent as of September 30, 2022, according to the Massachusetts Pension Reserves Investment Management Board. As of that same date, Fund XI had not made any distributions, but generated a TVPI multiple of 1.60x and IRR of 28.2 percent, according to a report from the University of Texas/Texas A&M Investment Management Company.
The charges against Insight come shortly after news that the firm had reduced the target for its latest flagship from $20 billion to $15 billion, as Venture Capital Journal previously reported.
The SEC has made it clear that private equity, and in particular, private equity fees, are a key focus of Gary Gensler’s tenure as chairman. As early as 2021, Igor Rozenblit, former co-head of the SEC’s private funds unit and now-founder of regulatory consultancy Iron Road Partners, told Buyouts that regulators will be looking to make sure GPs properly adjust management fee calculations in situations where an investment has been written down or off.
In other words, it appears Insight has charged investors a management fee on something that is permanently impaired when it has told its LPs they would not be charged in those circumstances, said Sarah de Ste Croix, an investment partner at law firm Stephenson Harwood. “Investors have to know what they’re coming into [when they invest in a fund],” she said.
The issue hits two SEC hot topics of fee transparency and conflicts of interest, de Ste Croix added. Typically, private equity funds charge management fees on committed capital for the first five years when the vehicle is in its deployment stage. In the next five years, management fees are calculated on the assets that remain in the fund, with adjustments made for those assets that have been written down or written off, she said.
With Gensler’s efforts gaining momentum with a legislative curtain-raiser in May, it’s safe to assume that more enforcement actions are to come.
Additional reporting by Lawrence Aragon