KKR has agreed to pay nearly $30 million to settle charges that it had unfairly charged institutional investors fees for unsuccessful buyout bids, and thus allegedly breached its fiduciary duty.
According to the US Securities and Exchange Commission (SEC), the private equity giant had moved more than $17 million of “broken-deal” expenses to its flagship funds over a six-year period ending in 2011.
“Although KKR raised billions of dollars of deal capital from co-investors, it unfairly required the funds to shoulder the cost for nearly all the expenses incurred to explore potential investment opportunities that were pursued but ultimately not completed,” said Andrew Ceresney, director of the SEC’s enforcement division.
“KKR’s failure to adopt policies and procedures governing broken deal expense allocation contributed to its breach of fiduciary duty.”Over the same period, KKR incurred $338 million in similar due diligence expenses for these unsuccessful buyouts, the SEC added.
Furthermore, the regulators said KKR failed to allocate some of these fees to co-investors that included its own executives who “participated in the firm’s private equity transactions and benefited from the firm’s deal sourcing efforts.”
According to the SEC’s findings, the New York City-based firm also did not inform its investors of these expenses in limited partnership agreements or any related materials. And until 2011, KKR hadn’t implemented a written compliance policy detailing its fee allocation practices.
“KKR’s failure to adopt policies and procedures governing broken deal expense allocation contributed to its breach of fiduciary duty,” said Marshall Sprung, co-chief of the SEC’s enforcement division.
KKR neither admitted nor denied any of the SEC’s allegations.
Instead, its spokesperson said in a statement that the firm takes its fiduciary responsibilities seriously.
“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 spokesperson said.
Earlier this year, it was revealed KKR refunded about $8 million to pension plans in 2014 after the SEC found the firm had incorrectly allocated and failed to disclose certain fees.
“The SEC concluded that certain ‘strategy expenses’ including senior advisor fees, research fees, and broken deal expenses should have been allocated differently among investment vehicles,” KKR said in February.
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