With one LP – Wells Fargo – how is your job different from that of your peers at other private equity firms?
We are really the private equity investment arm of Wells Fargo, but we have a structure that is similar to all other private equity firms in that we've organized a series of limited partnerships. With only one partner, there is a difference as it relates to fundraising, and as it relates to monthly and quarterly reporting.
Who do you report to?
We report to the CEO of Wells Fargo, Dick Kovacevich. We do quarterly portfolio reviews, and typically meet with him. We report monthly through Wells Fargo's financial reporting system.
How does Wells Fargo's status as a publicly traded corporation affect the way you treat valuations of portfolio companies?
Until recently, the valuation question had come up in regards to reporting to Wells Fargo. We historically reported up to Wells Fargo on a cost basis. The part of our portfolio that was publicly traded, that appreciation found its way to Wells Fargo's balance sheet, but changes in that appreciation wouldn't flow through the income statement.
That all changed here in the last year when we were required either to choose the fair value method of accounting for reporting to Wells Fargo, or use the equity method of accounting, meaning that for companies in which we own a 20 percent or more stake, our pro-rata share of income or loss from that portfolio company would be considered income or loss that would flow through to Wells Fargo.
Given some of the difficulties with the whole valuation issue, and given how the SEC seems to be scrutinizing all kinds of methodologies these days, we thought it would be preferable to go to the equity method of accounting when reporting to Wells and then Wells to their shareholders. It's all aggregated. We still go through the valuation process but it is unaffected by Wells Fargo's status as a publicly-held company.
How much extra work is the equity method of accounting?
Going either to a more exacting fair value method of accounting or the equity method was going to result in more work than what we had done in the past. I'm not sure which one would have been more time intensive. Clearly, it's a lot more work when we have to get the financial statements of 40 of our portfolio companies and do the math and figure out what portion of our income is added to each quarter.
How did you come to change your reporting process to the equity method?
It was really a requirement driven by the SEC and the outside accountants, who concluded that what we had been doing for the past 30 years was not correct.
Is it too soon to judge how this move to a new methodology will affect your relationship with Wells Fargo, and in turn Wells Fargo's message to the public about its private equity arm?
I've tried to insulate the rest of the firm with how we report to Wells Fargo. We want to continue to manage the business as we have successfully over many years, and not let how we report drive how we run the business. It has not had a meaningful impact on our results. Wells Fargo is so large relative to our activities.