SEC puts Private Equity in its Sights
By David M. Toll
Feb 06, 2013 06:04 PM EST
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Feb 06, 2013 06:04 PM EST
An official in the enforcement division of the Securities and Exchange Commission said late last month that the agency has its eye on several private-equity industry practices that could disadvantage investors, such as the charging of deal fees and cherry-picking of deals.
Speaking in New York City at a conference hosted by Private Equity International on Jan. 23, Bruce Karpati, the chief of the SEC enforcement division's asset management unit, observed that the agency has been bringing more cases involving private-equity firms or "private equity-like issues."
He pointed to eight recent cases, including ones involving employees of advisory firm Adams Street Partners and private-equity firms Brantley Capital, Onyx Capital and TPG Capital. The accusations range from insider trading to misappropriating funds, to usurping investment opportunities, to outright stealing.
"Much of the improper conduct in private equity arises out of conflicts of interest, which can lead to misappropriation, deal cherry-picking and other forms of misconduct," Karpati said. In addition, Karpati pointed to the overhang of capital available to be put to work by buyout firms as a potential "stressor," since it "means that there is more capital chasing the same number of deals, which puts extra pressure on returns."
This, in turn, has led to an environment where many firms are fighting to survive and which could "incentivize managers to engage in aggressive marketing, and may lead some to cross the line into inappropriate behavior," he said.
Karpati went through several potential conflicts of interest that are of particular concern to the SEC:
Just how tough the SEC will get on such conflicts and the bad behavior that can result from them remains to be seen. But it's clear the agency has gotten up to speed on an industry that some accused it only a few years ago of not understanding.
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