Leading private equity firm KKR is facing criticism for lack of transparency from some investors about fee refunds that were prompted by a US Securities and Exchange Commission (SEC) examination.
Several US public pension plans have come forward to say KKR informed them of credited fees in early 2014, but failed to disclose why it decided to reimburse the charges.
The SEC reviewed KKR’s 2011 and 2012 activities and found the private equity giant incorrectly charged some expenses and failed to disclose collections of certain fees, according to an investor document filed the following year.
“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 the document.
Following the SEC’s critical “comment letter,” the firm said it refunded about $8 million to investors in early 2014.
In an earnings call Tuesday, KKR’s Head of Investor Relations Craig Larson said the firm’s dialogue with the SEC is ongoing and added the majority of the refunds were “related to the allocation of expenses between what we call our flagship private equity funds and co-investment in other vehicles that invest alongside of those funds.”
However, certain pension plans said they were not informed of the SEC’s review until the Wall Street Journal reported it last month, and expressed concern about the firm’s transparency.
Denise Nappier, Connecticut’s state treasurer, confirmed that the state’s $29.4 billion pension fund received a fee credit of nearly $69,000 in March last year, but was unaware that “a portion of this credit was specifically attributable to KKR’s fee allocation policy questioned by the SEC” until January 2015.
“I am concerned with the manner in which the specifics of this fee credit came to light,” Nappier said. “My expectation is that there will be far greater transparency going forward.”
The Los Angeles County Employees Retirement Association and the Washington State Investment Board were also reportedly unaware of the SEC exam until they contacted KKR for an explanation of the refunds.
KKR said it takes its fiduciary duties and communication with limited partners very seriously and is “disappointed to learn about any concerns.”
“We communicate regularly with our limited partners, including our fund advisory committees, on this topic and other fund matters and we will continue these important dialogues,” the firm said.
The SEC has found overwhelming evidence of and an “enormous grey area” in hidden fee collection from examining private equity firms since 2012, according to the regulator.
“Many limited partnership agreements are broad in their characterization of the types of fees and expenses that can be charged to portfolio companies,” Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said last year. “Poor disclosure in this area is a frequent source of exam findings.”
Related: SEC: Private Equity Firms and Illegal Fee Collections