Two of private equity firm Thomas H. Lee Partners' funds agreed to pay a total of $6.5 million, including $1.5 million in civil penalties, to the Securities and Exchange Commission for failing to adequately inform investors it was receiving accelerated fees from portfolio companies, according to a June 29 SEC order.
The SEC charged that Thomas H. Lee Equity Fund VI and Thomas H. Lee Equity Fund V both charged portfolio companies fees for performing consulting and advisory services, and upon early exit, funds officials charged the portfolio companies a lump sum of all the fees Thomas H. Lee Partners would have earned if the companies had not been exited before the end of the funds' agreements with the portfolio companies, the SEC order shows. Fund VI was formed in 2006 and closed in 2007 with $8.1 billion in commitments, while Fund V closed in 2000 with $6.1 billion.
"By engaging in a practice of negotiating and receiving accelerated fees from portfolio companies without adequately disclosing this practice to all of the funds' limited partners prior to their commitment of capital, certain statements by THL to the funds' limited partners were made misleading," the order stated.
Some $5 million is to be deposited in a disgorgement fund and distributed back to the two funds' limited partners.
"The SEC did not allege that THL's investors were harmed financially by the receipt of any accelerated monitoring fee," a THL spokesman said in a statement. "In addition, the SEC order acknowledges that 78% of the capital committed to the 2006 fund received pre-commitment disclosure on this type of fee, and that THL consistently disclosed and shared these fees with the limited partners of both funds."
According to the order, Thomas H. Lee Partners gave limited partners an offset for portfolio company fees of 60% against future management fees due for Fund V and 65% for Fund VI.