The SEC’s private equity focus isn’t going away

SEC registration isn’t the only compliance matter GPs should worry about.

The US Securities and Exchange Commission continues to step up its focus on the private equity industry, spending more time in past months on issues relating to private funds including valuations and side letters.

Delegates in attendance at PEI’s 2nd annual Private Fund Compliance Forum in New York last week have taken notice of the SEC’s increased efforts and are unsurprisingly unhappy.

One major issue highlighted at the conference was the SEC’s focus on side letter agreements, or “preferential treatment” for some investors over other investors in a fund.

One delegate told PEM that his firm feels a lot of pressure over side letters. “It’s not about preferred treatment, it’s about a relationship that goes back over a decade. I don’t think the SEC realises that,” said the delegate. “Terms need to reflect that long relationship.”

Valuation estimates made by private equity firms are another area of interest to the unit and proves just as vexing to some GPs.

“There’s a long running joke at the firm that whatever (valuation) we produce, someone, somewhere will refer to it as fuzzy math,” said another delegate in attendance. “We use an independent firm, but it’s also an imperfect science. That issue falls on deaf ears to some at the agency.”

Another issue that had delegates buzzing was Form PF. Under the SEC’s proposal, registered firms would have to submit information on funds’ creditors, investor concentration and monthly performance data.

“I’m all for disclosure, but I take issue with this,” said another delegate. “Forcing us to report performance data monthly would be an exercise of excessive regulation.”

Also, if Form PF becomes law, large firms (those managing $1 billion or more) will need to submit further information on a range of items including bridge loans, leverage placed on portfolio companies and a breakdown of funds’ investments by industry.

One compliance officer joked, “Is nothing sacred?” The SEC clearly doesn’t think so.