Fund Sponsor's Fee Calculation Mistake Leads To SEC Enforcement

A settlement last week involving a private equity fund sponsor is a reminder that compliance with fee calculation provisions and valuation policies and procedures are crucially important for fund managers. Even when an error is the result of simple negligence, the SEC will take enforcement action when fee calculations do not strictly comply with the governing documents, especially where investments are overvalued.

ECP Manager LP is a private equity fund adviser that served as the manager of ECP Africa Fund PCC (the "Fund"), among other private equity funds. The manager collected management fees from the Fund based on its total invested capital contributions, but under the Fund's Shareholders Agreement, could not take fees for investments that had been written down or written off. In 2010, the Fund obtained warrants on the common stock of an African mining company, attributing $3.41 million of invested capital contributions to the warrants. However, by March 2014, the Fund had valued these warrants at zero, and shortly thereafter the warrants expired with no value. Nonetheless, in 2014 and 2015, ECP Manager included the full $3.41 million when calculating its management fees on invested capital. The SEC did not identify any...