Blackstone Group spokesman Peter Rose called out limited partners recently while explaining the firm’s lack of disclosure around accelerated monitoring fees. He’s exactly right in pointing out that LPs sat idly by when told the firm accelerated fees even though it never mentioned the practice in the limited partnership agreement.
Blackstone earlier this month settled an SEC investigation by agreeing to pay $39 million — $10 million in a civil penalty and $28.8 million in a disgorgement of fees paid back to investors.
The SEC accused Blackstone of a lack of disclosure around use of accelerated monitoring fees, as well as lack of disclosure of vendor discounts the firm received. Blackstone didn’t admit to any wrondoing.
Accelerated monitoring fees is a particularly odious practice in which portfolio company monitoring agreements that terminate before the end of their term get accelerated to full payment upon exit of the investment. The management agreements often can run 10 years or more and are at times subject to automatic extensions.
In Blackstone’s case, each accelerated fee was disclosed when received, and the Blackstone LP Advisory Committee “did not exercise its right to object,” Rose said in a statement when the SEC announced the settlement.
Why not? Why did the LPAC not object when this lump sum came out of the portfolio company to the GP, especially as it was not something the LPs apparently knew about until it happened?
This is the kind of thing I’ve been arguing about in this forum for a few years now. I’m not a person who believes the government represents the best solution to every problem, especially this one. Because in this case, tighter SEC regulation should be entirely superfluous if only LPs would get more vigilant, more demanding, more merciless in their rejection of terms they don’t agree with.
But this is not the way the industry works. This $39 million settlement is not even a blip on Blackstone’s radar screen. The firm just raised $17.5 billion in a matter of weeks and will continue to raise funds without a problem because it is a strong performer.
The firm was asked about the settlement on its recent third-quarter earnings call, and had the kind of response you might expect from a firm that raises money as quickly as it can come up with investment ideas.
“We’re all trying to be as fulsome with disclosure as we possibly can be,” said Blackstone president Tony James. This means “disclosures will go from 50 pages to 100 pages,” he said, which, for Blackstone, and its growing team of compliance officers, represents no burden at all.
Blackstone announced last year it stopped collecting monitoring fees from companies it was exiting. Let’s hope others follow suit and let’s hope LPs get harsher in their scrutiny of such practices. Because ultimately the top cops in this industry should be the LPs, not the government.