Apollo Global Management agreed to pay $52.7 million to settle Securities and Exchange Commission charges that some of its private equity funds misled fund investors about fees and a loan agreement, and that Apollo failed to supervise a senior partner who charged personal expenses to the funds, said a SEC press release issued Tuesday.
Investors will receive $40.3 million of the settlement, the SEC said.
Some of the charges stemmed from Apollo's practice of accelerating payment of future monitoring fees charged to a portfolio company in a lump sum when the company is sold or taken public ahead of schedule. These fees are paid in full to Apollo, which can represent payment for work that is not performed, the agency said.
An SEC investigation found Apollo failed to adequately disclose the benefits the alternative investments firm received to the detriment of fund investors by accelerating the payment of future monitoring fees owed by the funds' portfolio companies.
“The lump-sum payments received essentially reduced the portfolio companies' value prior to their sale or IPO and reduced amounts available for distribution to fund investors,” the SEC's release stated.
The SEC is cracking down on general partners failing to adequately disclose to limited partners that the monitoring fees they charge to portfolio companies for advisory services will be paid in full on exit. In October, Blackstone Group paid $39 million to settle charges that accelerated monitoring fees and legal fee discounts benefiting the firm were not fully disclosed to investors.
Failure to properly disclose fees and conflicts of interest to limited partners is a “common theme” in SEC's recent enforcement actions, said Andrew J. Ceresney, director of the SEC enforcement division, in the release. “Investors in Apollo funds were not adequately informed about accelerated monitoring fees and separately allocated loan interest, and therefore were unable to gauge their impact on their investments.”
Apollo said in a written statement provided to Pensions & Investments that it had disclosed each accelerated fee in schedules provided to the funds' limited partner advisory committee.
“This SEC matter primarily arose from the absence of specific disclosure in Apollo's limited partnership agreements for (Apollo Investment) Funds VI and VII concerning the possibility that monitoring fees owed to Apollo might be accelerated upon the IPO or sale of a fund portfolio company, a common industry practice,” the statement said. “Despite the lack of specific disclosure in the original limited partnership agreements, the disclosure concerning the nature of fees that might be charged was extremely broad.”
The SEC also found that Apollo had made a loan to five of its funds to defer taxes Apollo would owe on carried interest. Apollo was supposed to pay interest on the loan to the funds and had listed accrued interest as an asset on the funds' financial statements. However, instead of paying the interest to the funds, Apollo paid the interest to itself — making the financial statements misleading, the SEC release stated.
“At no time were fund investors any worse off as a result of the loan,” Apollo said in its statement.
Apollo had successfully sold two portfolio companies from Apollo Investment Fund VI in 2008, which generated gains. Rather than take carried interest from the deals, Apollo's share of the gains was lent to it, the firm's statement explained.
“Apollo paid about $3 million in interest on the loan, which was then allocated as income to Apollo and on which taxes were paid by Apollo,” according to the statement.
The SEC also charged Apollo with failure to supervise an unnamed former Apollo senior partner who was twice caught improperly charging personal expenses to Apollo funds and their portfolio companies. Apollo's only disciplinary actions were verbally reprimanding the partner and requiring the partner to repay the improperly submitted expenses, the SEC investigation found. An Apollo review found even more personal expenses the partner improperly charged to fund clients, leading to the partner leaving Apollo, the SEC stated.
Apollo reimbursed the funds for any improper expenses and voluntarily reported the matter to the SEC, according to Apollo's statement.
“As the SEC acknowledges, Apollo itself discovered and remediated the expense account misconduct committed by a partner several years ago as part of a periodic compliance review of expenses,” the statement said.
Apollo declined to identify the partner, said Eric Kuo, spokesman, in an e-mail.