Historically, the SEC’s investigative reach was limited to firms that trade primarily in public securities, including mutual funds, hedge funds, and investment advisors. As Private Equity becomes an increasingly mainstream asset class, SEC scrutiny grows – most recently around the industry’s methods of portfolio valuation.
As private equity firms have proliferated, state pension funds have begun funneling progressively more money into these investments. According to Prequin, “large” Public Pension plans (defined as those firms with excess of $1bn in AUM) have an average allocation to Private Equity of 11.2% as of December 2011 – up 3.1% since 2001. However, Public Pensions aren’t the only investors increasing their allocation to Private Equity. The wave of Private Equity firms “going public” – including Blackstone, Carlyle, and others means that Private Equity can now directly impact “Main Street” investors.
Now that “Main Street” has a larger stake in the performance of Private Equity the industry is pressed for more transparency through the FOIA (Freedom of Information Act). We are seeing a public outcry to ensure the policeman that patrols our streets, the fireman awaiting an alarm, and the teacher motivating our children all have security where their investment and retirement money is allocated.
The SEC has begun its initial ‘interviewing’ of Private Equity firms and their practice of valuing their investment holdings. The questions provided to several PE firms requests information such as supporting evidence for the valuations of all fund assets and any document establishing an assigned value for any assets owned by the fund. Here’s the kicker: For the past three years!
The Valuation process has traditionally been an art that is mastered by each PE firm in their own way. In today’s world filled with Ponzi schemes and questionable ethical practices, the SEC wants to not only see the finished work of “ART”, but they also want to see the paint brushes used, the various hues of each color in the art, and if there has been a consistent use of artistic technique in valuations done across Private Equity funds.
Two questions clearly need to be answered:
- How does a PE firm consistently and efficiently provide the information needed to justify its valuations to its internal and external constituents (SEC, Auditors, Valuation Firms), all while keeping costs low and data integrity high?
- How does a PE firm accurately monitor the “true” numbers from the investment data collection process to the external distribution recipients while maintaining data integrity across all groups (Valuation, Finance, Investor Relations, Fund Accounting, etc.) within their firm?
The answer is simple: iLevel Solutions
iLevel Solutions provides the flexibility to integrate any data point into any existing model or reporting package while providing the transparency required by the current stakeholders and potential stakeholders of their proprietary data. By incorporating the iLevel platform, General Partners have the capability to provide an audit trail of its values in real-time, across standard and ad hoc forms, all while minimizing any disruption to its day-to-day workflow.
Justin Marchi Twitter: https://twitter.com/#!/JustinMarchi