KKR: Co-Investors Shared the Deals, Funds Carried the Costs

KKR agreed to pay nearly $30 million to settle a securities enforcement case alleging that it shifted broken-deal expenses onto its flagship private equity funds while co-investors benefited from the same deal sourcing. The Securities and Exchange Commission’s case concerned the cost of buyouts that never happened. If you handle deal expenses, fund accounts or investor disclosures, the allocation decision may be the part of this story you recognize: the business searched for opportunities together, but the bill did not follow everyone who benefited.

The Securities and Exchange Commission announced the settlement on June 29, 2015, naming the private equity adviser Kohlberg Kravis Roberts & Co. L.P. This page follows that adviser’s failed-deal costs, co-investor treatment and settlement payments. Our broader page on private fund fees and expense allocation explains the comparison between agreed terms and actual charges across different fund practices.

The Costs Outlived the Proposed Buyouts

Broken-deal expenses are costs incurred pursuing investments that do not close. In KKR’s case, the agency described $338 million in broken-deal or diligence expenses tied to unsuccessful buyout opportunities and similar expenses over a six-year period ending in 2011. The agency charged that more than $17 million had been misallocated to the flagship funds.

The agency’s allegation concerned how KKR divided those costs among the participants benefiting from its search for investments. We look at the charge against the agreement and disclosures: whose opportunities did the work support, and whose fund paid for it?

Co-Investors Benefited Without Sharing the Failed-Deal Bill

The Securities and Exchange Commission alleged that KKR’s co-investors participated in its private equity transactions and benefited from the firm’s deal sourcing, yet received no allocation of these broken-deal expenses for years. Those co-investors included KKR executives.

The agency’s enforcement director described the imbalance in the agency’s announcement. His comparison put the capital raised from co-investors beside the costs assigned to the funds:

We see shared opportunity and a one-sided bill in the agency’s allegation: KKR’s own executives could benefit while the funds carried nearly all of the unsuccessful costs. If your work connects co-investor participation to expense allocations, you may know how that division was chosen. In the agency’s account, the opportunities had company. The bill mostly did not.

What the Fund Disclosures Left Out

According to the Securities and Exchange Commission, KKR’s limited partnership agreements and offering materials did not expressly disclose that co-investors would receive no allocation of broken-deal expenses. The agency charged the adviser with breaching its duty to the funds.

A nearby pattern appeared in the Securities and Exchange Commission’s case against Insight Venture Management. The agency alleged that Insight calculated management fees at the portfolio-company level instead of the individual-security level required by partnership agreements. It also alleged that undisclosed impairment criteria preserved the amount on which fees were charged. KKR’s case concerned who paid failed-deal expenses. Insight’s concerned which investments went into the fee calculation. In both accounts, the terms investors agreed to and the rule used to charge them needed to be read together.

The Missing Allocation Policy Had a Financial Consequence

The Securities and Exchange Commission alleged that KKR did not implement a written compliance policy governing fund expense allocation until the end of the period it examined. The agency said that failure contributed to the breach of duty. An examination by the agency led to the investigation.

For an insider, the useful connection is between the policy and the allocations made under it. Someone involved in preparing or approving those charges may know how the business decided which participants would pay, and what happened when that decision was questioned. We examine that account alongside the written policy and the actual charges.

What KKR Agreed to Pay

The Securities and Exchange Commission’s settled order required a payment of $18,677,409 to compensate affected flagship private equity funds. A separate $10 million civil penalty was payable to the agency for transfer to the U.S. Treasury.

The order’s repayment calculation already accounted for a refund made in 2014. It also accounted for the portion of expenses KKR bore under its fee-sharing arrangements. For someone reviewing repayments, the distinction matters: the order credited money already returned and separated the funds’ costs from KKR’s own share.

The Records Behind a Broken-Deal Allocation

The useful securities fraud evidence connects what investors were told with the work performed, the allocation chosen and the money charged. For a private-fund accountant, deal professional or compliance employee, that connection may run through records encountered in ordinary work. We build the account around the part you understand and the decisions you can explain.

Failed-deal invoices and allocation workpapers can connect a cost to the fund charged. Deal-sourcing and participation records can explain whose investment opportunities that work supported. The limited partnership agreement and offering materials then supply the investor-facing side of the comparison. Read together, those records let us ask why the expense went to that fund and what investors had been told about paying it.

The approval history supplies another part of the story. We want to understand who chose the allocation, how it was explained, and whether the written policy reflected what actually happened. Refund records can show a later correction to the charge. Your knowledge of those decisions gives meaning to figures that otherwise look like ordinary fund expenses.

What Private Fund Insiders Bring to an SEC Whistleblower Case

The SEC whistleblower program can pay eligible whistleblowers a combined 10% to 30% of qualifying sanctions collected in an action with more than $1 million in monetary sanctions. We work through what that award framework means for your information with you. The value of an insider’s account lies in connecting a specific practice to evidence the SEC can test.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate program from the SEC action discussed here. For a private fund allocation concern, our conversation starts with the charges, disclosures and decisions you know, so we can assess the securities whistleblower case with you.

You Know Why the Charge Landed There

If you know why a co-investor escaped a failed-deal charge or why the investor disclosure differs from the allocation, talk with our whistleblower experts about the decision behind the bill. We bring your account and the financial records together with securities fraud whistleblower lawyers who understand private fund expenses. You have our expertise and partnership through the case, starting with the part of the business you know from the inside.