The presence of the BSO and possibly the transaction itself usually allows the professional unit (practice) to stay out of the PE transaction, but not always. The strategy behind the OSO is to build the infrastructure and total value of the company as a management entity. The creation of binary values creates future transaction advantages, i.e. the “second apple bite.” In addition, the professional component may remain intact and not be mixed with commercial and administrative services. The SEC has taken a number of these steps in recent years. The focus on this issue was part of the SEC`s overall focus on disclosure practices of private equity fund managers in general to ensure fairness to their investors. Accelerated monitoring fees, i.e. charging portfolio companies a fee for the implementation of advisory services, consulting or other similar services, and then, after the “early” exit (i.e. before the expiry of the management agreement between the Fund and the holding company), to collect a lump sum of all commissions that the fund manager would have collected had the companies not left the law prematurely, was not at the centre of the application itself. On the contrary, the SEC introduced actions in which this practice was not properly disclosed to fund sponsors in their offering documents (i.e., their private placement memorandum and/or share sponsorship partnership agreement) prior to the sponsors` commitment to the fund. Because management service agreements often have long durations, an expedited pricing system can result in a significant payment to the fund manager, which the SEC says requires adequate publicity. The SEC clarified that such disclosure should take place prior to the commitment and that the inclusion of the information in the fund`s performance statement to investors is insufficient after the fact.
In any event, when regulators ask questions about this and other issues to ensure adequate royalty implementation, transparency with investors will remain essential. Prior to the conclusion of a similar services, advisory or portfolio management agreement, which contains a provision for accelerated monitoring fees, it is preferable to check whether the possibility of a fund manager earning accelerated fees has been properly disclosed in the Fund`s disclosure of the private placement and other offering documents. Typically, after the transaction, the OSO is mandated by the PE/Practice consortium (“NewCo”) through a Management Services Agreement (MSA). The OSO therefore includes a separate assessment and an annex independent of the practice of the PE business. The separate unit (the BSO) may or may not be purchased, or the practice cannot be purchased instead of the BSO being the acquired unit. The OSO will be used through extensive services and existing technology, management know-how, etc. infrastructure with growth and future value. There are some nuances as to whether the fund in question has a “provision for compensation” for the administrative levy. The practice of charging accelerated fees significantly reduces the value of the portfolio business in the event of an exit. However, many private equity funds provide for offset management fees that reduce fund administration costs because of all portfolio business expenses earned by the fund manager and its partners and employees. To the extent that accelerated monitoring fees are fully offset by fund-level management fees, investment returns would not be affected by limited partners. However, not all administrative compensation is the same.
While the industry has recently experienced a trend of more than 100% compensation provisions, many private equity funds still have management offsets of 75% to 80%, and some top-animal companies apply even lower offset management percentages. In addition, even funds that have a 100% compensation provision do not isolate themselves