Silver Lake adopts unique policy governing accelerated monitoring fees

  • Silver Lake can only collect accelerated fees if it meets one of two criteria
  • Fee must benefit LPs, or not hurt LPs because of an equivalent offset
  • Policy appears to be first of its kind

Silver Lake adopted a policy governing its use of accelerated monitoring fees that appears to be a first of its kind in the industry.

The policy, established last year, was disclosed in Silver Lake’s Form ADV. Silver Lake has discussed the policy with limited partners but has not talked about it broadly outside the firm, according to a person with knowledge of the firm.

According to the document, Silver Lake can collect an accelerated monitoring fee only if it meets one of two criteria.

The first is that the fee must benefit LPs, taking into consideration current and future advisory fees available to be offset against the management fee, the policy said.

The second is that LPs must be no worse off by the firm accepting the fee, through a fee offset equal to the potential cost of the firm accepting the fee, the policy said. That offset must be disclosed to fund LPs.

Accelerated monitoring fees work like this: A GP forms, say, a 10-year monitoring contract with a portfolio company it acquires. If the GP sells the company in fewer than 10 years, the GP still takes in the full monitoring fee, in one lump sum.

The Securities and Exchange Commission has scrutinized this type of arrangement to ensure that firms are fully disclosing their ability to accelerate full payment of monitoring contracts.

Blackstone Group settled with the SEC for $39 million last year in a case that involved improper disclosure of accelerated monitoring fees. Blackstone did not admit or deny wrongdoing.

Formalizing existing policy

Silver Lake did not establish the policy because of pressure from the SEC or LPs, according to three people with knowledge of the firm. Rather, the firm sought to codify what it had been doing in the past, according to the people.

After fee acceleration became an SEC focus, the firm looked at all the fee-acceleration payments it had collected and determined that LPs were either better off or at least made whole in each case, one of the people said.

The policy, then, was “formalizing” what the firm had already been doing, the person said.

The policy was important because fee acceleration “has in the past and is likely in the future to be substantial, particularly in the event such circumstances occur early in the life of the fund’s investment,” according to the firm’s Form ADV.

The accelerated payments have been calculated as the “present value of hypothetical foregone future payments (which in some cases exceed 10 years, are subject to automatic extensions and renewal, extend past the term of a fund, and/or may be based on an assumed growth in EBITDA or another metric used to calculate the fee),” the Form ADV said.

Two people outside Silver Lake who are familiar with accelerated monitoring fees said Silver Lake’s policy appears to be the first of its kind. Whether other firms are thinking about similar policies is unclear.

Action Item: Silver Lake’s Form ADV:

Photo: Jim Davidson, Co-Founder and Chairman of Silver Lake, speaks at a panel discussion “Private Equity: Where Risk Meets Opportunity” at the 2009 Milken Institute Global Conference in Beverly Hills, California April 28, 2009. REUTERS/Fred Prouser