How misinterpreted LPA terms led to a $1.5m fine for a US private equity fund adviser

The misinterpretation of terms in LP agreements, and the lack of ability to review those terms can not only cause impairment with investment portfolios and management fees, but they can also lead to regulatory fines and reputational damage.

This is what recently happened to New York-based investment adviser Insight Venture Management LLC who have been fined by The Securities and Exchange Commission (SEC), for ‘charging excess management fees and failing to disclose a conflict of interest to investors relating to its fee calculations’. According to the official release, the SEC penalty involved a $1.5m fine and $864,958 in ‘disgorgement and prejudgment interest’ which had to be returned to the affected funds.

The SEC order found ‘from August 2017 through April 2021, Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements. ‘Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit said: "Investment advisers must accurately calculate their fees in accordance with the fund documents."

Since many private equity firms are still using spreadsheets to deal with distribution waterfalls, and/or have no way of validating LP agreements, other than through manual means, it’s clear that this kind of situation likely happens more frequently than is reported. Risk can be reduced by having the ability to aggregate and review LPA terms which also increases transparency.

Gregor Kreuzer, CPO and Co-Founder of qashqade commented: “Any fund manager may make an honest mistake by using non-specialized software - such as spreadsheets - to do these calculations. It is simply not worth the risk.” The SEC is clearly taking this seriously. If you have needs to validate your investment management fees and carried interest split, or how you are interpreting the LPA, then it might be time to speak to qashqade about how to use automation to replace manual, error-prone processes.

qashqade provides an easy and structured way to help you centrally track the carry allocations and distributions of your investments, and it can be used in collaboration with your asset manager to achieve instant, accurate results.