Private equity funds that specialize in real estate are attracting regulatory scrutiny over hiring that can boost the firm’s fees while sticking investors with higher expenses, Securities and Exchange Commission Chairwoman Mary Jo White said Friday.
SEC examiners are looking into poorly disclosed business relationships that benefit advisers to private equity funds, Ms. White said at a speech in New York. The inspections open a new front in oversight by the SEC, which this year won multimillion-dollar settlements with Blackstone Group and KKR & Co. over fee arrangements.
Real estate funds are hiring businesses they control to do work for portfolio companies in cases where unrelated firms might have done the work at lower cost, Ms. White said at the Managed Funds Association’s Outlook 2015 conference. Fund advisers might have made misleading disclosures about the contracts, she said.
“Disclosure about these arrangements may be non-existent or potentially misleading, particularly with regard to whether or not the related parties charge market rates,” Ms. White said, citing concerns expressed by SEC staff.
Blackstone Group, the world’s largest private equity investor in real estate, agreed last week to pay almost $39 million to settle claims that it failed to fully inform investors about fees and business discounts that benefited the company. Blackstone gained “substantially greater” discounts on legal work than was reflected in rebates applied to its funds, which are mostly owned by investors, according to the SEC’s complaint.
Ms. White said Friday that SEC examiners “continue to observe advisers collecting millions of dollars” in the fees without disclosing the practice.
In June, KKR & Co. agreed to pay $28.5 million to settle allegations that it allowed some investors, including the firm’s executives, to sidestep costs tied to unsuccessful corporate buyouts. The SEC’s investigation found that $338 million of “broken deal” expenses were not imposed on investors who got favorable treatment.