SEC Queries Private Equity Valuations

Increased Scrutiny for Private Equity Valuations

The U.S. Securities and Exchange Commission has started an informal inquiry of private equity firms, asking for a broad range of documents on how the funds value assets and who invests in them, reports Bloomberg’s BusinessWeek.   The agency’s Los Angeles office last year sent letters to several firms asking for details on fund investments and the valuation of assets, as well as communication with clients, according to the copy of a letter obtained by Bloomberg News. Firms were asked to produce the documents by the end of last year.

Private equity firms have come under scrutiny in the aftermath of the financial crisis, which forced firms to mark down holdings acquired during a three-year boom that ended in 2008 when the collapse of Lehman Brothers Holdings Inc. froze credit markets. Financial reform measures such as the Dodd-Frank Act have proposed more oversight of the firms’ businesses.

An inquiry six years ago into whether firms drove down prices of takeover targets in so-called “club deals” didn’t result in government action, although several firms were subsequently accused by private plaintiffs of conspiring to rig the market for leveraged buyouts.

. . . The SEC in June voted to require private-fund advisers to register with the agency, although publicly traded private equity firms already provide detailed information in quarterly and yearly filings. The mandate forces 750 advisers to disclose “census-like data” about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising.