Sideline CFOs

Some 400 finance and operational professionals from around the globe braved the sub-zero temperatures and several inches of snow in New York to attend the PEI CFO & COOs Forum last week.

Every year CFOs and COOs make this pilgrimage to reflect on the industry and their roles within it. And with so much to discuss – not least the new threat of SEC inspections and more grueling exchanges with auditors – there was no shortage of pithy comments on the sidelines. These were some of our favorites:

“You need deal fees to build your firm up? That is so 2003.”

As always, there was a lot of talk about the factors that can make or break a GP’s chances on the fundraising trail. One LP, for example, said that he and a growing number of his peers were no longer accepting a 50/50 split with fund managers on deal fees. The stale argument fund advisors make, according to this LP, is that deal fees are needed to pay junior staff bonuses, update internal systems and possibly expand. His riposte? “You had the chance to build your firm up ten years ago.”

“I can’t say that I’m disappointed with the budget. It decreases the risk of an inspector showing up at our door.”

Based on some back-of-envelope math, CCOs figure that a cash-strapped US Securities and Exchange Commission will have a tough time inspecting 800 private fund advisors this year, as planned. A budget deal approved earlier this month by Congress set aside $1.35 billion for the agency's fiscal year ending in September – a figure substantially below the $1.67 billion requested by chair Mary Jo White. The SEC was hoping to use that cash to add 250 inspectors to its current roster of about 400.

During fiscal year 2012, the SEC examined only about eight percent of registered advisers. Assuming – based on its small budget increase – that the SEC can visit (an optimistic) 15 percent of the roughly 4,000 still-to-be-examined population of registered investment advisers, 40 percent of whom are private fund advisors, that still only represents about a 1 in 17 chance of being inspected in 2014 as a private fund advisor yet to face an audit.

Moreover, one delegate said the SEC is listening to Republicans on Capitol Hill who question the value of private equity inspections. A bill passed in the House to clear private equity advisors from SEC oversight was given a 50-50 shot of being taken up in the Senate this year by one delegate close to the Washington DC political scene.

“Just give your auditor a lot of paper and they will be happy!”

As readers of PE Manager know all too well, auditors are pushing down harder on CFOs who don’t show enough math on their fair value estimates – even if that math doesn’t actually provide a lot of value given that these marks will always be pretty subjective. One CFO joked that she just runs as many valuation models as it takes to feed her auditor enough paperwork. That said, on a more serious note, she advised her colleagues that “when in doubt, write it out” – in other words, if there’s any uncertainty about where to move a valuation, the figures should be accompanied by supporting documentation.

Couldn’t make the conference in person? Be sure to check out the March edition of PEM for a full round-up of what you missed.