The SEC charged a private equity sponsor with breaching its fiduciary duty to a pair of private equity funds by sharing expenses between a company in one’s portfolio and a company in the other’s portfolio in a manner that improperly benefited one fund over the other. The private equity sponsor did not admit or deny the charges
The SEC stated an investigation found that while the private equity sponsor integrated the two portfolio companies and managed them as one, the funds were separately advised and had distinct sets of investors. Despite developing an expense allocation policy as part of the integration, it was not followed on some occasions, resulting in the portfolio company owned by one fund paying more than its fair share of joint expenses that benefited the companies of both funds.
According to the SEC, the portfolio companies shared numerous annual expenses that generally were allocated between them based on each company’s contributions to their combined revenue. However, there were times when a portion of the shared expenses were misallocated and went undocumented. For example, the company owned by one fund paid the entire third-party payroll and 401(k) administrative expenses for the employees of both companies. The subsidiary of one fund’s portfolio company sold supplies and performed services at cost for the other fund’s portfolio company even though that funds’s portfolio company did not pay any share of the overhead expenses for the subsidiary. Additionally, there were several employees who performed work that benefited both companies, but their salaries were not allocated between the two.