What’s Really Going on with PE Firms’ Fees?

by Pepper Hamilton LLP

Pepper Hamilton, PEF Services, PEI Create Benchmark to Review Practices

PHILADELPHIA (November 18, 2014) — Pepper Hamilton LLP, a multi-practice law firm that represents private equity clients throughout the life cycle of an investment fund, recently partnered with PEF Services and PEI to conduct a survey of 104 U.S. alternative fund managers to examine certain fee practices. The survey came on the heels of an announcement by Andrew Bowden – Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE) and head of its National Exam Program – that nearly half of the funds recently reviewed by the SEC were in violation of the law to some degree.

The goal of the survey – “Fees and Expenses 2014: A PFM Benchmarking Survey” – was to create a benchmark to compare and review managers’ practices about having the funds they manage bear certain types of fees and expenses. The survey enables firms to compare practices and, if it finds it is not consistent with standard practice, modify its procedures before piquing the curiosity of SEC examiners. Additionally, firms may decide to avoid fees and expenses that should be treated as a fund expense or absorb those that should not.

For example, as a result of the upturn in SEC registration, many fund managers have hired attorneys or compliance consultants. However, then the argument arises over who pays for registration. Investors argue that it is a firm expense, but many firms argue it is actually a fund expense. The results of the survey show that many firms have conceded that registration is, in fact, a management firm expense. Costs associated with examinations, however, have not been so uniformly absorbed.

“The environment in which fund managers must operate currently is about as challenging as any since the inception of the private funds industry,” said Julie Corelli, partner and co-chair of Pepper Hamilton’s Funds Services Group. “Today’s combination of market values, competition for investment opportunities, external pressures from investors, internal pressures for talent and succession, regulation and regulators’ enforcement mentality are pretty unique.

“We helped to spearhead this survey with PEF and PEI because overall, there is very little in the way of any formal guidance on which kinds of expenses should be fund expenses and which shouldn’t,” Corelli continued. “There is only the ‘one-size fits all’ guidance and it is all high-level. One of the hopes of this survey is to highlight nuances that every fund CFO and CCO must manage. A key takeaway from the survey is that the need for crystal-clear disclosures and fund agreements is more apparent than ever.”

“One of the things we heard from our clients is that there is not a lot of guidance for CFOs with regards to handling the allocation of expenses and the charging of fees. This survey provides them with a benchmark that they can use when making those decisions,” said Anne Anquillare, co-founder and CEO of PEF Services, a fund administrator to small and emerging private capital funds.

“We also believe that the survey will not only help educate the industry but also the regulators and their enforcement arms as well,” Anquillare continued. “The private equity industry is very diverse, and the difference between small and large funds is huge. Regulatory authorities by their very nature need to be broad-brushed, and I believe that the survey will help to sensitize them to the differences between large and small firms so that we can avoid unintended consequences that could hurt the industry.”

Full results of the survey are available here.

About PEF Services
PEF Services is fund administrator to over 125 small and emerging private capital fund managers, including early and later stage venture capital, debt, real estate, special purpose vehicles, growth capital, buyouts, multistage and fund of funds, among other strategies. Our services include bookkeeping, preparation of financial statements, capital management (capital calls, distributions) and working with auditors and tax preparers. We have a national reputation for our work with SBIC funds. Our proprietary web-based software facilitates the collection and dissemination of information and reports to clients and their investors. PEF Services undergoes an annual SSAE 16, SOC 1 audit to insure our controls and systems meet or exceed industry standards. You can learn more at our website.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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