LPs

LPs say SEC scrutiny aids push for transparency

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  • LPs say they benefit from SEC examination of fees and expenses
  • Investors seek disclosure of operating partner compensation
  • GPs now refunding monitoring fees for companies that were sold: LP

“With the SEC’s help, we’re moving to a period of greater exposure, but it will always be a delicate dance, especially with high-demand GPs,” said Heidi Poon of TorreyCove Capital Partners, who spoke on an LP panel at the conference in Cambridge, Mass. (The conference producer is Buyouts Insider, publisher of Buyouts.)

TorreyCove, an adviser to pensions such as the Oregon Public Employees Retirement Fund, has been more aggressive in seeking disclosures around the compensation of operating partners and advisors, Poon said. “That was a murky area.”

GPs frequently use operating partners or advisers to improve performance at the portfolio company level. However, it is often unclear whether LPs foot the bill for those services.

SEC scrutiny also helped LPs seeking clarity around portfolio company fees that GPs do not use to offset management fees for investors, Poon said.

GPs frequently use transaction or monitoring fees collected from portfolio companies to offset the management fee LPs pay for investing in the fund, but “the new thing is that the 100 percent offset would exclude 20 things,” Poon said. “Sometimes you have to figure out what those are.”

“I think the SEC has definitely helped the LP side,” said Ravi Ugale of GenSpring Family Offices. Ugale, who spoke on the same panel, said that certain general partners are now refunding LPs for monitoring fees they received from companies that had already been sold.

“GPs would get monitoring fees for 10 years or so, and then they would sell the company in four, and collect on the remaining six,” he said. “They’ve come back and said, ‘We’re going to refund.’”

In February, SEC officials said the regulator’s pursuit of cases involving misallocated fund expenses or fees improved transparency and reduced costs for limited partners. Several firms, including Blackstone Group, Kohlberg Kravis Roberts & Co and WL Ross & Co have reimbursed LPs or curtailed practices deemed questionable by the SEC in recent months.