Much has been written about the SEC’s presence exams. About how to prepare for them, about their findings and about the outcomes. And many managers will have thought: “They don’t apply to me”; “I’m too small they won’t visit me”; “I don’t have US investors and I’m not registered – I don’t need to bother.”
The reality is this isn’t the case. What the SEC has found and the publicity it has gained has put the world on notice. Other regulators have taken notice. Potential investors have taken notice and the politicians have taken notice. Not all have acted – many are just watching, but investors and potential investors have started to take notice. And when they do it affects everyone, no matter where the fund and the fund manager are located.
Fees and expenses, not only the level of fees, but the different types of fees and charges levied by the manager, have become a focus for many investors. Going forward managers must be completely open and transparent regarding their fee structures. This has not always happened in the past, as the SEC has identified, but investors are on notice. Practices are beginning to change but investors are still not completely satisfied. Fund documents must clearly state the allocation of expenses and the financial statements must illustrate that the legal words are being carried out in practice. With 38 percent of investors dissatisfied with the transparency of “Consultants and Operating Partners Expenses” (EY/PEI 2015 Private Equity Survey) the industry has some way to go.
Similarly much has been made of fund performance, especially when a new fund is being marketed. How accurate are the figures? Are the performance calculations correct? How good are the valuations of the remaining portfolio? The findings of the SEC have made potential investors more aware of the issues. And investors have enhanced the quantity and depth of their due diligence, affecting all managers raising new funds. With more funds than ever raising money – 2,252 globally, according to recent Carlyle data – it is those managers that can support and explain their numbers in detail that will be effective in raising new money.
A transparent valuation process, and a process that remains consistent quarter after quarter and year after year, has been another SEC highlight. And this issue was picked up by the European politicians when they constructed the AIFMD. Now the depositary is required to ensure that “the valuation process is formally documented” and “that the process is consistently followed year after year.”
The recent actions of the SEC have “moved the market.” Issues have been opened up and as a result investors are demanding more openness and transparency from their investments. And this creates new issues for managers. Formal procedures must be in place, data needs to be properly managed. Fees need to be calculated properly with all the supporting back-up. Resources need to be allocated (or perhaps recruited?) to deal with the ever increasing demands from investors. And all of this at a time when management fees themselves are under pressure.
This increased focus on the operational aspects of funds is not going away. Investors and regulators alike are now demanding far more than just fund performance. Some managers will deal with matters in-house – increasingly many are looking to experts to assist them with this changing environment. But no matter where you may be located, the SEC has changed your world for good.
Brendan Tyne is a New York-based managing director with Augentius, a private equity and real estate fund administrator.