Private Equity SEC Inquiry
Private Equity Firms Face Informal SEC Inquiry over Valuation
The biggest news in the private equity industry lately is the SEC informal inquiry of several private equity firms. The SEC is reportedly looking into how private equity firms value their investments and report performance to investors. Because private equity firms have to value private investments that are not listed on a public market, this can be difficult and the SEC is looking at whether private equity firms have pumped up valuations in order to attract more investors to funds.
It’s hard to say what the ultimate conclusion to this inquiry will be; it has certainly brought some unneeded bad publicity to the industry but Dan Primack suggests that the SEC is not looking at a systemic issue.
The Securities and Exchange Commission has begun a broad examination of the private equity industry, seeking information about the business practices of some of the country’s most powerful financial firms.
The S.E.C.’s enforcement unit sent a letter late last year to several private equity funds as part of what it called an “informal inquiry” into the industry, according to two people with direct knowledge of the matter who requested anonymity because they were not authorized to discuss it publicly. It is not clear which firms received the letter.
While the S.E.C. emphasized that the request should not be construed as an indication that it suspected any wrongdoing, its goal in gathering information was to investigate possible violations of securities laws, these people said.
One focus of the inquiry is how private equity firms value their investments and report performance. Unlike the valuing of publicly traded stocks, valuing private equity investments — largely in private companies that are not listed on an exchange — can be a thorny and subjective process. Source
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