U.S. regulators found illegal collections of fees or severe compliance shortfalls in more than half of the private equity firms it has examined since 2012, a Securities and Exchange Commission official said.
“By far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses,” Drew Bowden, director of the SEC’s office of compliance inspections and examinations, said Tuesday in a speech at the Private Fund Compliance Forum in New York. “We have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.”
The SEC has inspected more than 150 private equity firms since starting presence exams of the industry in October 2012. The agency created a special unit of examiners to handle inspections of the more than 1,100 private equity firms under its purview, Mr. Bowden said. The SEC intends to have examined 275 of the firms by year-end, he said.
Ken Spain, a spokesman for the Private Equity Growth Capital Council, which represents more than 30 firms, declined to comment on the SEC’s findings.
The SEC has repeatedly found private equity firms paying operating partners with investor funds or money from the portfolio company rather than the buyout firm, Mr. Bowden said. Operating executives, which private equity firms use to find growth opportunities and potential efficiencies in companies, are often touted by the firm as a service and then paid for by fund investors or the companies, he said.
“This effectively creates an additional ‘backdoor’ fee that many investors do not expect,” Mr. Bowden said. “The adviser is able to generate a significant marketing benefit by presenting high-profile and capable operators as part of its team, but it is the investors who are unknowingly footing the bill.”
The transcript of Mr. Bowden’s speech is available on the SEC’s website.
