SEC continues focus on private fund managers

The US Securities and Exchange Commission has ramped up its focus on private equity fund managers, looking at marketing materials, valuation metrics and side letters. These topics, among others, were covered at PEI's 2nd annual Private Fund Compliance Forum in New York.

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.

It was announced last year that the Asset Management Unit was increasing its focus on the private equity industry with the asset management team looking into side letters that offer “preferential treatment” for some investors over other investors in a fund, according to Bruce Karpati, co-chief of the SEC’s asset management unit.

“We look at materials such as pitchbooks and DDQs. We also look at whether some investors are preferred, and whether that preferential treatment is disclosed to other investors,” Karpati said during the PEI Private Fund Compliance Forum in New York Wednesday. “When it comes to enforcement, it’s about the protection of investors.”

Valuation estimates made by private equity firms is another area of interest to the unit.

“Valuation is an issue we see across the fund arena. One of the issues we watch is whether third parties assessing valuations are truly independent,” said Karpati. “Despite the fact that there is an independent party, we still need to scrutinise whether managers are accurately representing their valuation process.

The SEC will look at valuations even if they are audited, said Igor Rozenblit, a private equity specialist with the SEC’s asset management unit.

We are concerned with auditors’ scrutiny of valuations. Are you saying this company is valuable when it’s valueless?

Igor Rozenblit

“We are concerned with auditors’ scrutiny of valuations. Are you saying this company is valuable when it’s valueless?” said Rozenblit.

However, terms and conditions, including fund extension negotiations, is an area the asset management division strives to stay away from.

“The fund extension issue is a negotiation between the LPs and GPs. We will focus on when LPs base their consents to extensions on misrepresentations,” said Rozenblit.

The SEC’s asset management unit was formed last year, with Karpati and Robert Kaplan named as co-heads. Karpati founded and led the commission’s hedge fund working group, and was an assistant regional director in the SEC’s New York regional office.

Rozenblit focuses on investigations and examinations of private equity advisors and other investment managers on issues including valuation, due diligence, private fund governance and formation, and conflicts of interest management.