Private equity firm, KKR & Co. (NYSE: KKR) is in a world of trouble right now and it seems like a $30 million settlement is what it will take to make the problem go away for now.
What KKR & Co. is being accused of?
In a first of its kind case involving a major PE firm, KKR faces allegations of misallocation of fees. In essence, outside investors footed the bill on expenses that should have been borne by Henry Kravis and his partners. Estimates put the tab at $17 million in fees that were wrongfully passed on to the outsiders. It is believed that the firm carried on this practice for over six years, all the way up to 2011.
SEC clamping down
The Securities and Exchange Commission has in recent times begun scrutinizing fee payments with a much closer eye. In the case of KKR, the SEC alleged that the PE firm’s insiders had sidestepped payment of broken deal fees, passing the cost on to outside investors. These broken deals were instances involving deals that didn’t succeed in their effort to buy a company.
KKR has in the past, been adventurous in their interpretation and policy surrounding fees. Only last year, the media brought to light instances of fee retention involving KKR Capstone, the group’s consulting outfit. In a separate civil federal case, Henry Kravis as well as six separate private equity co-defendants went up against shareholders to contest allegations of profits being withheld by their PE firms.
KKR opts for a settlement
KKR has gone ahead and agreed to a settlement amounting to about 30 million dollars, in lieu of a formal jury trial, where the case was originally headed. This is a slight dent in the finances of a firm that has raised billions in deals that usually got its executives a hefty paycheck.
The firm went on record to say that the case pertained to historical expense allocation disclosures. These policies did not relate to current practices of the firm. They did not confirm or deny whether or not the allegations of misallocation were accurate.
As per reports, just 52 percent of the 8.7 billion dollars raised by the flagship PE fund in 2012 had been invested. Analysts predict that the launch of a new buyout fund is likely to be on the cards. KKR’s spokesperson said the focus would be on continuing to deliver value to investors.