SEC probing private equity performance figures
The U.S. Securities and Exchange Commission is examining how private equity firms report a key metric of their past performance when they market new funds to investors, as the regulator boosts its scrutiny of the industry, according to people familiar with the matter.
At issue is how private equity firms report how they calculate average net returns in past funds in their marketing materials, the sources said.
Net returns, also known as the net internal rate of return (IRR) and an indicator of investors’ actual profits, deduct private equity fund investors’ fees and expenses from a fund’s gross profits. Private equity fees are not standard and different investors in the same fund can pay different fees.
Fund investors such as pension funds, insurance companies and wealthy individuals – known as limited partners – pay the fees to the private equity firm. The private equity firm and its managers, called general partners, also typically invest some of their own money into the funds, but don’t pay any fees.
Including the general partner’s money in the average net returns can inflate the fund’s average net performance figure, and the SEC is investigating whether private equity fund managers properly disclose whether they are doing that or not, the sources said.
Source: Reuters-SEC probing private equity performance figures
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