SEC probes consulting fees and clawback at Fenway Partners

The New York-based firm alerted LPs that it had received a Wells Notice form the SEC in early March. The notice signals that regulators are considering enforcement action, giving recipients time to challenge the allegations. Reception of a Wells Notice does not mean enforcement action is imminent.

Fenway, founded in 1994, is a middle-market investor. It currently has seven companies in its portfolio, including American Achievement, BRG Sports and Refigerated Holdings, according to its website.

The SEC informed Fenway that it was looking at various issues, including payments made by portfolio companies to Fenway Consulting Partners LLC, sources said. The exact relationship between Fenway Consulting Partners and the firm is not clear.

The regulator is also looking into how the firm has handled disclosing to limited partners information related to fund financial statements and a GP clawback. A clawback obligation arises when a fund manager takes distributions early in the life of a fund that eventually have to be returned to investors because they turn out to have exceeded the agreed-to profit share.

Fenway spokesman Brian Shiver and SEC spokeswoman Judith Burns declined to comment.

In its March 31 Form ADV filing, Fenway explained how it charges portfolio companies fees and expenses and how much of that activity it reveals to investors. For example, the firm charges portfolio companies expenses in connection with services performed. Such expenses can include limousine service, first-class travel and late-night meals in the office.

Portfolio companies reimburse the firm for those expenses, but the amount of the reimbursement “often will not … be disclosed to investors in the funds,” Fenway said in the filing.

The firm also explains in the Form ADV how co-investments are allocated, including to GP-affiliated vehicles that do not pay advisory fees or carried interest.

The SEC has been looking into how private equity firms disclose fee and expense arrangements related to co-investments, although it is not clear if the agency is probing this particular issue at Fenway. Kohlberg Kravis Roberts has been in talks to settle with the SEC over how it disclosed the sharing of broken-deal expenses among its funds and co-investors, Buyouts has reported.

Fenway’s three funds, which are all beyond their investment periods, have not produced strong returns relative to its peers’ funds.

Fenway Partners Capital Fund I, a 1996 vintage vehicle that raised about $527 million, has generated a 1.01x investment multiple and a 0.30 percent internal rate of return, according to June 30, 2014, performance data from Bison. Fund II, a $909 million fund raised in 1998, produced a 1.25x total value multiple and 5.3 percent IRR as of June 30, 2014, according to the Oregon Public Employees Retirement Fund. Meanwhile, Fund III which raised about $700 million in 2006, generated a 1.02x total value multiple and a 0.30 percent IRR as of last June, Oregon reported.

Performance data was unavailable for Fenway HTM Sponsorco LLC, a $1.4 million vehicle Fenway raised from five investors in January 2014 for a single deal.

Fenway has been trying to restructure at least one of its core funds in the secondary market, sources said. One source said the firm was seeking bids earlier this year.

Enforcement action against private equity firms is relatively rare. Last year, the SEC reached a settlement with middle-market firm Lincolnshire Management. The firm agreed to pay more than $2.3 million to settle the case, which accused the firm of improperly allocating expenses to an older fund that should have gone to a newer fund. Lincolnshire did not admit or deny wrongdoing.

The SEC has been taking a closer look at how private equity firms handle fees and expenses since the Dodd-Frank financial reform act required such firms to register as investment advisers. Last year, Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said examiners had found widespread problems in their early examinations of the industry.

The SEC announced recently that Bowden will leave the agency by the end of April and will be replaced by Marc Wyatt, who will take over as acting director of the Office of Compliance Inspections and Examinations.