SEC Charges Private Equity Advisers With Inadequate Disclosure
The Commission has brought a series of cases against private equity centered on undisclosed fees and conflicts of interest – key areas of interest during OCIE exams. The latest proceeding in this string of cases involves four private equity advisers whose parent is Apollo Global Management, LLC which has about $170 billion under management. Its shares are traded on the New York Stock Exchange. In the Matter of Apollo Management V, L.P., Adm. Proc. File No. 3-17409 (August 23, 2016).
The proceeding centers on inadequately disclosed fees, a failure to fully disclose the terms of a loan agreement and inadequate supervision. Respondents are Apollo Management V, L.P., Apollo Management VI, L.P., Apollo Management VII, L.P. and Apollo Commodities Management, L.P. Each is a private equity fund adviser registered with the Commission as an investment adviser. The parent of each is Apollo Management V.
Respondents have advised multiple private equity funds. Each is governed by a limited partnership agreement. In each instance a management fee equivalent to about 1.2% of capital under management – reduced by certain credits – is charged. The general partner of each Fund is entitled to 20% carried interest on all distributions made by the Fund after contributed capital and a hurdle rate of 8% has been returned to limited partners.
Each Apollo-advised fund owns multiple portfolio companies. Typically, Respondents enter into monitoring agreements with each portfolio company that is owned by an Apollo advised fund. Those agreements provided that Apollo can charge certain portfolio companies monitoring fees in exchange for rendering certain consulting and advisory services to the portfolio companies regarding their financial and business affairs. While the monitoring fees are in addition to the other fees charged, there are certain credits. The agreements typically run for ten years.
The monitoring fees can be accelerated if certain events occur. Those typically include a private sale or IPO of a portfolio company. Under those circumstances Respondents can terminate the monitoring agreement, accelerate the remaining years of fees and receive a present value lump sum termination payment.
Respondents disclosed certain fees and Special Fees. They did not adequately disclose their practice of accelerating monitoring fees until after the limited partners had committed capital to the Funds and the accelerated fees had been paid. Since Respondents have a conflict of interest as the recipient of the accelerated fees, they cannot effectively consent for the funds.
In June 2008 the general partner to Fund VI, Advisors VI, entered into a loan agreement with Fund VI and four parallel funds which were the Lending Funds. The Lending Funds advanced Advisors VI about $19 million – the amount of carried interest due to Advisors VI from certain transactions. The loan deferred taxes. Despite the terms of the loan agreement and the related disclosures showing that the interest income from the loan was accruing, the Lending Funds’ financial statements failed to disclose that the accrued interest would be allocated to the capital account of Advisors VI. This made the disclosures about the loan and interest payments materially misleading.
Finally, from January 2010 through June 2013 a former senior partner of Respondents improperly charged personal items and services to advised funds. After repeated instances and an internal investigation Respondents reported the conduct to the Commission. The Order alleges violations of Advisers Act Sections 206(2) and 206(4).
To resolve the proceeding Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondents will pay disgorgement of $37,527,000 and prejudgment interest which will be paid to a disgorgement fund. They will also pay a penalty of $12,500,000 and acknowledge that the amount was limited to that sum based on their cooperation.