The
U.S. Securities and Exchange Commission is examining how private equity
firms report a key metric of their past performance when they market new
funds to investors, as the regulator boosts its scrutiny of the industry,
according to people familiar with the matter.
At
issue is how private equity firms report how they calculate average net
returns in past funds in their marketing materials, the sources said.
Net
returns, also known as the net internal rate of return (IRR) and an indicator
of investors’ actual profits, deduct private equity fund investors’ fees and
expenses from a fund’s gross profits. Private equity fees are not standard
and different investors in the same fund can pay different fees.
Fund
investors such as pension funds, insurance companies and wealthy individuals
– known as limited partners – pay the fees to the private equity firm. The
private equity firm and its managers, called general partners, also typically
invest some of their own money into the funds, but don’t pay any fees.
Including the general
partner’s money in the average net returns can inflate the fund’s average net
performance figure, and the SEC is investigating whether private equity fund
managers properly disclose whether they are doing that or not, the sources
said.
An SEC
spokeswoman declined to comment.
The
SEC’s focus on the average net IRR disclosures, which has not been previously
reported, marks a new phase in the agency’s efforts to regulate private
equity and comes at a time when the industry is already under pressure from
investors to simplify its fees and expenses structure.
The
emphasis on performance figures is likely to cause many buyout firms to
review their regulatory compliance measures and force them to increase
disclosures and make their numbers more intelligible to investors.There is no
standard practice for calculating average net IRRs among the roughly 3,300
private equity firms headquartered in the United States.
A
Reuters review of regulatory filings and interviews with people familiar with
different firms’ practices show the calculation varies widely even among the
top private equity firms.
Blackstone
Group LP, Carlyle Group LP and Bain Capital LLC, for example, do not include
money that comes from general partners in average net IRR calculations, while
Apollo Global Management LLC does, the review shows.
Fund
marketing documents are not public, but the sources said all these firms
disclose to investors whether they include general partner capital in the
calculation or not.
The
SEC’s review comes after the agency put together a dedicated group earlier
this year to examine private equity and hedge funds that had to register with
it as part of the 2010 Dodd-Frank financial reform law, Reuters first
reported in April.
Much of
the SEC’s focus so far had been on fees that private equity funds charge. In
a May 6 speech, Andrew J. Bowden, director of the SEC’s Office of Compliance
Inspections and Examinations, said more than half of the private equity funds
the agency examined had inappropriately allocated expenses and collected
fees.
COMPLEX
CALCULATION
The
average net IRR figure is crucial to investors’ understanding of their actual
profits from private equity funds.
To continue reading this story, please visit peHUB.com.
By Greg Roumeliotis
|
Thursday, November 6, 2014
SEC probing private equity performance figures: Reuters
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