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Matt Levine

KKR Didn't Want to Share Fees With Investors

Sometimes private equity firms commit Freudian slips in securities filings.

A couple of weeks ago, Andrew Bowden of the Securities and Exchange Commission gave a speech about private equity fees. It was pretty punchy, for an SEC speech. Especially punchy were the bits about "operating partners," which the SEC views as a way for private equity firms to get paid fees without sharing them with their limited partners.

Private equity firms buy companies with their limited partners' money, do things to them, and eventually re-sell them at (one hopes) a profit. The LPs pay the private equity firms for finding and buying and re-selling the companies, and the companies pay the private equity firms for doing the things (consulting, monitoring, operational improvements, whatever). The LPs worry about double-counting, and about just overpaying the private equity firms, so the partnership agreements provide that the fees that the portfolio companies pay to the private equity firms have to be shared with the LPs.