| Americas | Articles
The SEC has settled charges against ECP, a private equity fund adviser, related to excessive management fees. ECP was ordered to pay disgorgement and prejudgment interest of $122,656.
The SEC alleged ECP charged excessive management fees following the write-off of a private equity investment in an African mining company. ECP provides investment advisory services to ECP Africa Fund II PCC and other private funds. The Shareholders Agreement for the fund provided that twice a year ECP may charge a management fee equal to two percent per annum of total invested capital contributions. The management fee was to be reduced as a result of certain triggering events, including write-offs of specific portfolio investments.
In June 2010, the fund received approximately $3.41 million worth of warrants on the common stock of an African mining company. The fund’s financial statements valued the warrants at zero from April 2014, and in mid-June 2014 the warrants expired worthless and the fund wrote off the specific portfolio investment.
However, ECP included approximately $3.41 million of invested capital contributions attributable to the warrants in its fee calculations for July 2014, January 2015 and July 2015 causing the shareholders to overpay a total of $102,304 in management fees.
Charges reiterate the need for accurate fee calculations
The SEC noted that with the specific violations of the Advisers Act alleged against ECP there was no need to establish whether their actions were intentional. However, whether negligent or purposeful, it is clearly vital that private equity funds calculate management fees in line with disclosures to investors. The SEC highlighted fee calculations in its 2018 Risk Alert. The case against ECP once again reinforces the need for accurate management fee calculations.
You can read the SEC in full here: SEC order instituting cease-and-desist proceedings against ECP Manager LP
