Private equity faces new SEC inquiry, PR struggles
The private equity industry has shown a remarkable talent for flying under the regulatory radar--until just recently.
Nowadays, the industry is facing more calls to rationalize the taxes they pay on “carried interest,” and justify their use of financial engineering that results in massive special dividends paid to companies stuck with massive debts. The industry is also having to defend its use of the FPGC as a last-resort for companies that go belly-up. Now, on top of all that, comes media reports that the SEC is investigating the industry broadly for a litany of possible abuses, which may or may not be strictly against the law.
Fee structures and portfolio valuations will likely figure in the inquiry. Regarding the latter, it appears to some that the valuations of some portfolio companies are the result of a black box process. In part to head off these issues, the industry has started recently to provide some objective measures as best practices. All will acknowledge that the valuation process is tricky.
It remains to be seen if anything will actually come of this inquiry. But the industry does have something of a perception problem on its hands, and it needs to do something. These days, even Republican presidential candidates are calling the business model immoral. That’s not a good sign. And the industry can’t count on Mitt Romney to carry their flag.