According to The Wall Street Journal, the operating partners of private equity firms, are coming under closer scrutiny. These professionals are typically retained when acquiring a company with the intention of enhancing its operations.
These operating partners are usually listed with full-time employees. Regulators are worried that buyout firms are not providing private equity fund investors enough information about the way these consultants are compensated.
The firm usually doesn’t pay its operating partners. Instead, their salary usually comes from the company they are advising or the investors of the buyout firm. However, the WSJ’s examination of regulator filings regarding 80 private equity companies found that only about fifty percent of them disclosed where the money paid to operating partners comes from.
Meantime, Blackstone Group (BX) LP has decided to stop charging extra consulting fees when taking or selling public companies. This could save fund investors millions of dollars. The changes come in the wake of criticism from a senior SEC official about the practice.
These consulting payments are also known as monitoring fees. Private equity firms get into contracts with companies they purchase and they are paid these fees for years. If the company is sold or goes public before the contract is up, then the remaining fees are accelerated via a lump sum payment for services that won’t have to be rendered. Now, Blackstone will no longer collect these fees.
The SEC is looking at whether buyout firms garner hidden fees at cost to investors and without their permission or proper disclosure.
Heightened Regulatory Scrutiny Makes Blackstone Halt Some Transaction Fees, The New York Times, October 8, 2014
Private-Equity Consultants Face SEC Scrutiny, The Wall Street Journal, October 8, 2014
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