The Securities and Exchange Commission (“SEC”) is taking a hard look at how the private equity firms have been disclosing and managing their expenses. In the process, KKR & Co. L.P. KKR became one of the first casualties.
KKR has agreed to pay $30 million to settle the allegations of misallocating over $17 million in ‘broken deal’ expenses to its leading private equity funds, in breach of its fiduciary duty. Of the total amount, more than $14 million pertained to disgorgement and $4.5 million was prejudgment interest, while the remaining amount was the penalty paid by KKR. Notably, the company neither accepted nor denied the findings.
Andrew J. Ceresney, Director of the SEC Enforcement Division, said, “This is the first SEC case to charge a private equity adviser with misallocating broken deal expenses. Although KKR raised billions of dollars of deal capital from co-investors, it unfairly required the funds to shoulder the cost for nearly all of the expenses incurred to explore potential investment opportunities that were pursued but ultimately not completed.”
A probe by the SEC has revealed that KKR had incurred $338 million as broken-deal costs related to unsuccessful buyouts over a six-year period starting 2006. But instead of allocating such expenses to the company’s co-investors (including top executives) that participate and benefit from the PE firm’s deals, these were passed on to the funds of their limited partners. Notably, such allocation of expenses was even not disclosed clearly to the limited partners as well.
However, since 2012, KKR has changed its policies pertaining to allocation of ‘broken-deal’ expenses following an internal review.
In a statement, KKR said, “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. KKR is firmly committed to upholding the highest governance and transparency standards, and we remain dedicated to continually enhancing our practices on behalf of our fund investors.”
The initiative taken by the SEC is likely to lead to further enforcement actions against several other private equity firms in the coming months. Till now, there were no clear disclosure policies as to how these firms allocated/charged expenses to funds and investors. Notably, another major private equity firm, The Blackstone Group L.P. BX, disclosed that the SEC has requested information about fee practices.
Currently, KKR carries a Zacks Rank #3 (Hold). Better-ranked asset managers include Franklin Resources, Inc. BEN and Invesco Ltd. IVZ. Both these firms hold a Zacks Rank #2 (Buy).
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