Henry Kravis has a fee problem.
Kravis’ private equity powerhouse KKR & Co. on Monday agreed to pay $30 million to settle allegations it passed on to outside investors fees that its partners should have been charged.
The practice lasted for six years, until 2011, according to the Securities and Exchange Commission.
It resulted in Kravis and his fellow insiders paying nothing in “broken deal” fees. The insiders sidestepped more than $17 million in fees, the SEC said.
KKR’s outside investors were kept in the dark about the practice, the SEC alleged.
It is the first time a major PE firm has been charged with misallocating fees.
The case comes at a time when both the SEC and PE investors are paying closer attention to fees.
As part of the settlement, KKR did not admit or deny any wrongdoing.
“Before 2011, KKR had not considered whether to allocate or attribute broken deal expenses to KKR Co-Investors because in its view the flagship PE Funds bore all broken deal expenses,” the SEC said in its order.
Broken deals were instances in which KKR attempted to buy a company but failed.
“This resolution, which relates to historical expense allocation disclosures and policies and not to any current practices, allows us to focus on delivering value for those who invest with us,” KKR said in a statement.
While the settlement is small compared to the billions of dollars KKR has raised, it is not the first time the Kravis firm has been found to have pushed the envelope on fees — and in each case KKR executives got richer.
Last year, KKR was exposed for allegedly keeping fees that KKR Capstone, its consulting arm, collected from KKR portfolio companies.
The fees, paid by the companies for getting discounts on group purchases of such items as office supplies, should have been shared with outside investors.
KKR insiders kept all the fees. Kravis and other owners shared the fees only after media reports highlighted the practice.
KKR, as of March 31, had invested $4.5 billion — 52 percent — of the $8.7 billion flagship private equity fund it raised in 2012, so the firm will likely launch a new buyout fund in the next year or two.
Besides allegedly over-charging its own investors, Kravis last year — along with six other PE co-defendants — settled a civil federal case brought by shareholders who alleged that they were cheated out of profits because the PE firms colluded when buying the companies they owned stock in.
The alleged collusion kept the price of the takeovers artificially low, it was alleged.
KKR settled after much of the case had survived summary judgment and was headed to a jury trial.
The fee problem is not new.
Sarah Bartlett, in her 1991 book, “The Money Machine: How KKR Manufactured Power and Profits,” alleged that Kravis charged excessive fees.
KKR responded: “We take our fiduciary responsibilities seriously and have strived to adapt our policies and practices to the changing nature of the industry, market and our business.”
