KKR has settled SEC charges that the alternatives investment firm had from 2006 to 2011 charged investors in its private equity funds for deals it pursued but did not consummate, the SEC order issued Monday shows.
The firm did not charge co-investors broken-deal expenses for the deals in question, including pools of employee capital.
The settlement is for a payment of $17.4 million plus $4.5 million in interest and a $10 million civil penalty.
Deducted from the $17.4 million remediation to limited partners is $3.26 million already paid to investors in the first quarter of 2014.
KKR failed to disclose in its limited partnership agreement or other offering materials that it did not allocate broken-deal expenses to KKR co-investors, “even though these co-investors participated in and benefited from KKR's sourcing of private equity transactions,” the SEC order states. During the period, KKR paid 20% of so-called broken-deal expenses, while the funds paid the rest.
The firm also “did not adopt and implement a written compliance policy or procedure governing its fund expense allocation practices until 2011,” the order states. That policy was not in effect until Jan. 1, 2012.
"This resolution, which relates to historical expense allocation disclosures and policies, and not to any current practices, allows us to focus on delivering value for those who invest with us,” said a KKR statement. “We take our fiduciary responsibilities seriously and have strived to adapt our policies and practices to the changing nature of the industry, market and our business … we remain dedicated to continually enhancing our practices on behalf of our fund investors."
Although the order specifies KKR 2006 Fund, the firm's North American flagship fund, it covers all the funds from which KKR had invested during the five-year period. During the period, KKR 2006 invested $30.2 billion, while KKR co-investment vehicles and other affiliated vehicles invested about $4.6 billion.
Other private equity funds active during the period include KKR Millennium, KKR Europe 1, KKR Europe II, KKR Europe III and KKR Asia I.
Investors in the funds involved in the settlement include the $193.1 billion California State Teachers' Retirement System, $304.5 billion California Public Employees' Retirement System, $106.8 billion Washington State Investment Board, C$264.4 billion ($213.5 billion) Canada Pension Plan Investment Board and $14.5 billion Los Angeles City Employees' Retirement System.
“The WSIB is still in the process of getting information about the settlement with KKR,” said Kate Sandboe, corporate governance officer of the Washington State Investment Board, in an e-mail. “We don't have any details about possible refunds we may be getting.”
“I commend the Securities and Exchange Commission for its persistence, on behalf of Connecticut and other investors, concerning the adequacy of the disclosure of fees charged by KKR,” said Connecticut state Treasurer Denise L. Nappier in a written statement. “It is, however, disappointing to learn of the $10 million penalty portion of the $30 million settlement, which confirms that KKR did not serve its partners well in the early years of the KKR Millennium and KKR 2006 funds.”
Canada Pension Plan Investment Board spokeswoman Mei Mavin and CalSTRS media relations manager Michael Sicilia declined comment in separate e-mails.
KKR is not the only alternative investment firm that is in discussions with the SEC concerning potential breaches of its fiduciary duty. Blackstone Group revealed in May it is in discussions with the SEC over its monitoring fee practices and disparate application of vendor discounts to the firm and to Blackstone's funds before Blackstone changed its policies in 2011.
