July 6, 2026

By David Brunk, civil litigation attorney

The Fee Is Real Even When the Income Is Not

By David Brunk  ·  July 6, 2026  ·  Fiduciary

A wave of shareholder suits filed in 2026 accuses the advisers of large business development companies of charging fees on income their funds never collected in cash. The first of them, filed in April against the adviser to Blue Owl Capital Corporation, alleges that incentive fees were computed on payment-in-kind interest, paper income added to a loan's balance instead of paid, with no obligation to return the fee if the cash never arrives. Similar suits followed against the advisers to Ares Capital, FS KKR, and Blue Owl Technology Finance. The theory is narrow and specific: the fee is charged on money that has not shown up.

That theory is about to meet a much larger population of funds than the handful now being sued. A review of recent SEC filings across the registered-fund universe finds the same basic move, charging a fee on income that is projected, accrued, or unrealized rather than received, repeated in a dozen structural variations, many of them in the interval funds and non-traded products now being sold to retail investors. None of the variations is hidden. Each is disclosed, often in a single sentence buried in a fee footnote. The disclosure is the point: these structures are legal because they are disclosed, and they are dangerous for the same reason, because a disclosed structure that produces a fee in a year the fund lost money is a fact a court can examine without anyone having to prove fraud.

What the Filings Say

Consider what a reader finds in the funds' own annual reports. The figures below are quoted from the filings themselves and describe disclosed fee structures, not proven misconduct.

Sound Point Meridian Capital, a listed closed-end fund that invests in the equity tranches of collateralized loan obligations, recognized income during its fiscal year ended March 31, 2026 by projecting each position's future cash flows and accreting income at an effective yield the adviser itself sets, including positions the filing lists at "effective yield 0%." On that basis the fund recorded an incentive fee of $9,432,136 in a fiscal year in which net assets from operations decreased by $126,225,354, distributions of $61,394,440 included $16,871,047 of return of capital, and total assets fell from $514 million to $375 million. The fee was earned on projected income while the fund's value fell by a quarter.

Partners Group Growth, an evergreen registered closed-end fund currently offered to accredited investors while its adviser registers a public retail offering, charges a 15 percent incentive fee, with no hurdle and no catch-up, on "net profits" that its own filing defines to include "any net change in unrealized appreciation or depreciation of investments." For the year ended March 31, 2026 the fund recorded incentive fees of $5,171,689 against total investment income of $2,026,865. The fee was roughly two and a half times all the income the portfolio actually produced, in a year the fund reported a net investment loss of $12.7 million. The same adviser is the fund's valuation designee, the party responsible under SEC Rule 2a-5 for determining the fair value of the same illiquid positions on which its fee is computed. The fund also disclosed, and corrected as a "revision" rather than a restatement, an error that had overstated net unrealized appreciation by $1,445,587 and net asset value by $1,439,942, moving its reported annual return from 13.57 percent to 11.78 percent, during a period when it sold units monthly and repurchased them quarterly at the erroneous value.

First Trust Enhanced Private Credit Fund pays its adviser an incentive fee that its filing states "is not affected by any realized or unrealized losses that the Fund may suffer," crystallized and paid every month, so a good month pays a fee that a bad month cannot claw back. The same filing concedes that the adviser's decision to waive its management fee "may help the Investment Adviser achieve the Hurdle Rate and collect the Incentive Fee," an unusually candid admission that a fee waiver marketed to investors as a discount can function as a lever to convert fixed pay into performance pay.

These are three of a dozen structures the review identified. Others include incentive fees charged on the gross income of assets a fund holds only synthetically through swaps; management fees charged on capital investors have committed but not yet delivered; fee schedules that are set at half their permanent rate for the first two years, so the track record used to raise money is generated under economics no future investor will ever pay; and management fees charged on payment-in-kind interest that, once added to a loan's principal, is never removed from the fee base even after the loan stops paying.

Where the Law Already Is

The reason these structures are worth watching is not that they are novel. It is that the conduct they resemble has a settled enforcement record, and the current suits are the first attempt to reach the disclosed, structural version of it.

The SEC has repeatedly sanctioned advisers for charging fees on values they controlled and that later proved wrong. It has ordered advisers to repay fees kept on impaired or written-down capital in a line of cases running from a 2018 order against a business development company adviser through settled orders in 2019, 2020, and 2023. It has charged advisers whose registered funds transacted at erroneous net asset values, and, importantly, has charged the remediation itself as deficient when a fund treated a pricing error as immaterial and declined to reprocess the affected shareholder transactions. It has treated a daily-priced fund's reliance on stale marks as a violation of the duty to price at current value, in enforcement reaching back to the mutual fund scandals of 2003 and 2004, which at bottom were about buying and selling fund shares at prices known not to reflect current value. And it has told advisers, in a settled order, that letting the compensated side of a firm control the marks on illiquid positions is itself a compliance failure, even without proof that any particular mark was false.

What that record does not yet contain is a case about the disclosed fee structure as such: an incentive fee charged, exactly as written, on unrealized gains the adviser marked, or on projected CLO income, or on a monthly measurement that ignores losses. Several of the dozen structures have no enforcement precedent at all. That absence cuts two ways. It means a first suit would be building on analogy rather than on a case directly on point, which is harder. It also means that whoever brings the first successful case defines the rule, the position the Blue Owl plaintiffs occupied eighteen months ago when the payment-in-kind fee theory had never been tested and is now a cluster of five suits.

Why This Is Arriving in Retail Products

The migration that makes this urgent is the packaging of private credit for ordinary investors. The listed business development companies now being sued trade on exchanges, where the market prices the shares every day and a shareholder can sell. The newer vehicles, interval funds and non-traded business development companies, do not trade. Their price is the net asset value the adviser determines, investors can exit only through periodic repurchase offers the fund can limit, and the fee structures described above sit inside products a retail investor buys through a financial adviser rather than on an exchange.

The SEC's own examination staff has named this shift. Its 2026 priorities target the "retailization" of private assets and state that examiners will assess whether "liquidity, valuation practices, fee structures, and related disclosures are appropriate" at interval and tender-offer funds. FINRA has classified interval funds as complex products for purposes of the recommendation obligations a broker owes a customer. The regulators are watching the same structures this review identified, in the same wrappers, for the same reason.

Two Things That Do Not Depend on the Marks

For an investor holding one of these funds, and for the adviser who recommended it, the disclosures that matter are not the performance figures. They are two facts that no valuation model can manufacture.

The first is cash. Every one of the structures above produces a fee from income that has not arrived in cash, whether the income is projected CLO yield, accrued payment-in-kind interest, or an unrealized mark. A fund whose distributions persistently exceed the cash its assets generate, and whose fees are charged on income the borrowers are not paying, is making a promise its portfolio is not keeping, however the gap is papered over. The cash a fund actually receives is stated in its own filings, and it is the number the fee cannot inflate.

The second is the fee footnote itself. The sentences that carry these structures are short and public. "The amount of the Incentive Fee is not affected by any realized or unrealized losses." "Its capitalized interest will not be reversed." "The calculation methodology will look through total return swaps as if the Fund owned the referenced assets directly." An investor who reads the fee note as carefully as the performance table will see the structure before the loss arrives. As the companion pieces to this article describe, litigation in this field does not follow losses; it follows the gap between what a fund reported and what was real, and in these funds that gap is written into the fee schedule.

Related: Nobody Sues the Fund That Loses Money Honestly and When the Model Marks the Book, Who Meant to Deceive?

The allegations described here are taken from the filing and remain unproven; no responsive pleading is reflected in the source document.

David Brunk is a civil litigation attorney. He can be reached at david@newmanbrunk.com.