About 600 companies were charged with $20 billion in hidden fees by private equity firms, according to a recent academic research.
Oxford University and Frankfurt School of Finance & Management academic says those portfolio company fees were charged to companies in the US that have a total value of about $1.1 trillion. Researchers say that for the past few years, the total fees were $16 billion; which amounts to $20 billion with inflation.
The “monitoring” and “transaction” fees were agreed upon by the private equity firms and the company managers. While investors knew these types of fees, they don’t exactly negotiate even the smallest details.
“These fees are effectively hidden from investors. Investors usually don’t see these fees and don’t know how much they are paying,” Ludovic Phalippou, an associate professor at Oxford University, said during an interview.
Today, private equity firms are pressured to be more transparent about the fees they’re charging their investors. In May 2014, the SEC found illegal fees at more than 50% of the private firms they’ve evaluated. Among them is the Blackstone Group LP that agreed to pay about $39 million to SEC last October to settle its penalties on their fee practices. KKR & Co., on the other hand, paid about $30 million in June for its wrong allocation of expenses. A group of US state and city treasures wrote to SEC in July asking for private equity firms to be transparent on the fees they charge.
“As long as there is not any transparency it will be difficult to track these. A lot of people are frustrated with that.” Josvan Gisbergen, a senior portfolio manager of Achmea, said during an interview.
Private equity firms keep a part of the fees in addition to management fees and profit shares that are charged to investors. Some of these fees were given back to investors in private equity funds, while the rest are kept by dealmakers. The refund is made through the reduction of management fees charged to investors.
Some firms charge company fees to investors that equal to over 5% of the total value of the enterprise, the report says. Some of the fees are even puzzling. When KKR and Bain Capital LLC purchased HCA Holdings Inc. for $33 billion last 2006, a fee of $29 million was paid to the Frist Family, the founders of the company.
The spokesperson for the private equity firms declined to comment further on the issue.