The SEC Is Investigating The Private Equity Industry, And Not For Why You Think

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Photo: flickr: adamsmithjr

Since Mitt Romney declared his candidacy for the Republican Presidential nomination, his career in private equity, and the industry as a whole, has been picked apart by the press.Most of the talk has revolved around taxation and job creation, and while some controversial things have been said, for the most part it has just been talk. No action.

The New York Times has learned that that is about to change. The Securities and Exchange Commission is investigating the private equity industry — not for the taxes they pay, and not really even for the value they add to the American economy in terms of job creation. This investigation is focused on how private equity firms value the assets that they purchase.

“Valuation methodologies for certain assets in our funds can involve subjective judgments,” the Carlyle Group said in its SEC registration documents , “and the fair value of assets established pursuant to such methodologies may be incorrect, which could result in the misstatement of fund performance.”

A year ago, the SEC sent letters to several firms saying that they were beginning an “informal inquiry” into the industry. Big firms like KKR and Blackstone already come under government oversight, but there are thousands of smaller firms that don’t. Because of Dodd-Frank though, more firms, regardless of size, must register with the SEC by March.

This is similar to what the SEC does in examining hedge fund performance. They call it, “aberrational performance inquiry,” and they use proprietary risk analytics to measure if the funds’ reported performance is accurate.

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