SEC Scrutinizing Private Equity Performance Figures

By George Jennison

What is Happening:

The alternative investment industry is under pressure to simplify its fee and expenses structures, making their performance figures more intelligible to investors. As part of this increased scrutiny, the SEC is now examining how private equity firms report how they calculate average net returns in past funds in their marketing materials.

Private equity investors pay investor fees and expenses. Net returns, calculated by deducting investors’ fees and expenses from the fund’s gross profits, are an indicator of investors’ actual profits. Typically, the private equity firm and its managers also invest in the fund, but don’t pay any fees.

When the private equity firm and its managers’ money is included in the average net returns, it can inflate the average net performance numbers. The SEC is investigating whether fund managers are properly disclosing how they are reporting the net returns. In a May 6 speech, Andrew J. Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said more than half of the private equity funds the agency examined had inappropriately allocated expenses and collected fees.

What You Should Do:

  • In light of these latest investigations, you should review your regulatory compliance measures to ensure your funds’ calculations will withstand the increased regulatory scrutiny.
  • Ensure that your fund marketing documents disclose whether or not they include private equity fund and fund managers’ investment in the net return calculations.
  • Ensure that your fund marketing documents are equally reporting both net and gross returns in your fund marketing materials.

How Oyster Can Help:

As regulators increase their scrutiny of alternative investments, a robust compliance program is essential to protect your clients and your firm. Oyster Consulting stands ready to help your firm assess its policies and procedures for reporting fees and expenses, review your marketing documents, identify required actions, recommend best practices, and provide training to your personnel. Contact us if you have questions or need support to review your firm’s compliance needs.

Oyster Consulting, LLC
4128 Innslake Dr
Glen Allen, VA 23060