SEC Launches Private Equity Inquiry

(NewsCore) - Federal regulators have launched a wide-ranging inquiry into the private equity industry that examines how firms value their investments, among other matters, The Wall Street Journal reported Saturday.

The Securities and Exchange Commission's (SEC) enforcement division sent letters to private equity firms of various sizes in early December 2011 as part of an "informal inquiry," according to the letter and people familiar with the matter.

It is unclear which firms received a letter, which includes language saying it should not be construed as an indication that the agency suspects securities law violations.

The inquiry suggests regulators are ratcheting up the attention they pay to the $1.2 trillion industry, which typically hasn't been a major focus of the SEC. Private equity firms generally use debt to buy companies and then spend time improving operations before trying to sell them at a profit. These firms, which usually don't trade stocks or bonds, were not at the heart of the housing collapse, nor have they figured in recent high-profile trading scandals.

After the financial crisis, and as the private equity industry has grown, the SEC has moved more resources to policing the area. The SEC now has "an inventory" of cases involving private equity firms that it may bring, according to one of the people familiar with the matter.

SEC officials have told industry participants that the regulator is looking at how performance data is presented, said Michael Harrell, an attorney at Debevoise & Plimpton LLP. He said one concern could be presentation of misleading values when a firm is marketing.

Valuation issues have long been a subject of some debate around the industry because the companies that the firms own usually aren't listed on a stock market. There have been some instances when two separate private equity investors in one company have assigned it different values; firms have said they use different methodologies and valuing a private company can be more art than science. Some firms, such as KKR & Co., use outside firms and auditors to review their valuations.

The SEC's letter requested information related to 12 broad areas, including fundraising and fund formation. It asks the firms for "support for valuations of the fund assets," and "documents setting forth a value for any assets owned by the fund" over the past three years. The regulator also asked for details on "all agreements" between the private equity funds and others valuing a fund's assets.

The inquiry comes amid recent comments from SEC officials that the industry is drawing greater scrutiny.

"I think that private equity law enforcement today is where hedge fund law enforcement was five or six years ago," Robert Kaplan, co-chief of the SEC's asset-management unit, told the Dow Jones Private Equity Analyst Outlook conference in New York late last month.