Be explicit on broken deal expense bills, managers warned

US fund managers are advised to revisit their broken deal expenses policy after recent Securities and Exchange Commission enforcement action highlighted deficiencies in the area.

Citing the recent action against Platinum Equity Advisors, which was fined $3.4 million by the agency for allegedly charging three of its private equity fund clients broken-deal expenses that should have been paid by co-investors, lawyers at Hogan Lovells said fund managers must ensure fund documents are “sufficiently detailed.”

“[the documents] should explicitly address the issue of sharing broken deal expenses with any co-investment vehicles,” the firm said in a client note.

It added that the SEC’s action against Platinum Equity confirms the SEC’s continued focus on transparency of fees and allocation of expenses.

“Fund managers would be wise to re-evaluate their policies and disclosures relating to fees and expenses allocation,” it said.

A panel discussion about fees and expenses at last week’s Private Fund Finance and Compliance Forum in San Francisco concluded that in most cases, co-investors would not be charged broken deal expenses, but that their LPAs reflected this.

“It’s unlikely we would have co-investors on board at the time a deal broke, it would only be after we struck the deal that the co-investor would fully commit,” one of the panellists said.

A second shared this sentiment, adding that most costs would be allocated to the fund, but these costs are “minimal.”

A third argued that there are exceptions, and its recent take-private it required co-investors to be fully subscribed before the deal was signed.

“There was an expectation that they would pay transaction costs, and it’s not fair to charge the fund in this case. We worked it into the paperwork. In other cases, we would operate in a similar manner to the other panellists,” the panellist said.