By Sean Wilke, Head of Growth Strategy, U.S.
The year is 2015.
It’s barely three years since the Dodd-Frank Act imposed registration requirements on U.S. investment advisers to private funds. Many private placement memoranda (PPMs) and limited partnership agreements (LPAs) were drafted during the era in which private funds were able to avoid registration by providing advisory services to fewer than 15 clients – “clients” referring to the comingled vehicles under their management. There was little guidance or specificity standards available and virtually no oversight of the disclosures provided to investors.
Here’s a typical description of fund expenses in a PPM from a 2015 vintage fund:
"The Fund will bear all costs and expenses related to its operations, including but not limited to: organization expenses; legal and accounting fees; expense associated with identifying, evaluating and making investments; and such other expenses as the General Partner (GP) may determine, in its sole discretion, are properly borne by the Fund. The GP will bear its own overhead and compensation costs."
So… the GP will pay the salaries of its employees and the rent for its office space. That’s really all that this excerpt states. Everything else can rightfully be passed onto the fund. There isn’t even mention of an investment adviser, which reflects the fact that many fund structures lacked a dedicated management company before registration requirements were enacted.
The key features of 2015 disclosures:
- Broad “catch all” expenses provisions
- Unchecked GP discretion regarding expense allocation
- Few categorical expenses itemized
- No mention of regulatory, compliance, ESG, technology or reporting
Now, fast forward a decade.
Over the 10-year span between 2015 and 2025, we saw countless enforcement actions condemning the inadequacy of disclosures related to investment allocation, preferential investor rights, risk and – by far the most common – fund expenses.
From private jets to monitoring fees, the status quo as it related to fund expenses was upended. The U.S. Securities and Exchange Commission (SEC) made it clear that fund sponsors have an affirmative obligation to disclose fund-level expense with specificity so that investors have a fundamental understanding of the exact nature of the expenses they bear.
By contrast to the earlier example, here’s a typical description of fund expenses in a PPM from a 2025 vintage fund:
“The Fund will be responsible for its pro rata share of the following expenses:
- Organizational expenses, marketing and offering costs – Legal, accounting and filing fees associated with the formation of the Fund and corresponding fundraising, subject to a cap of $[XX,000] unless otherwise authorized by the Limited Partnership Advisory Committee (LPAC)
- Investment expenses – Due diligence, travel, data room, background checks, consultants and broken-deal costs not to exceed $[XX,000]
- Regulatory and compliance – Form PF filings, SEC and other regulatory examinations, compliance consultants, AML/KYC, cybersecurity audits, ESG data collection and annual fund audit costs
- Fund operations – Fund administration, tax reporting, insurance premiums, custodial and banking fees, valuation services, portfolio monitoring technology
- Third-party services – Expert networks, legal advisors relating to investments, and independent valuation agents.
The GP will bear its own overhead, employee compensation, office space and ordinary course operating costs. Any expense not expressly listed above requires either (i) prior disclosure in quarterly expense reporting, or (ii) LPAC approval if exceeding $[XX,000]. ”
The key features of the 2025 disclosures:
- Itemized, categorized expense descriptions
- Monetary caps and triggers
- LPAC approval requirements
- Explicit language regarding regulatory and compliance
- Emphasis on reporting
- Alignment with SEC private fund guidance and Institutional Limited Partners Association (ILPA) standards.
How we can help
Federal securities laws are disclosure based and predicated on transparency. With the SEC’s “back to basics” philosophy, disclosure will undoubtedly become a priority once again.
Have you revisited your disclosures lately? Do your LPs know exactly what they’re paying for? Is there ambiguity or room for improvement in how you describe fees and expenses?
Contact our expert team today for comprehensive support in assessing and enhancing the adequacy of your disclosures.
