The Carlyle Group is not worried about the increasing pressure by the U.S. Securities and Exchange Commission on the private equity industry around fees and expenses.
During its first quarter earnings call Wednesday, Bill Conway, co-founder of Carlyle, said the firm holds two meetings a year with large investors in each fund for a portfolio review that includes discussion of valuation methodology and fees charged to portfolio companies.
“We worry about a lot of things but this is not one of them,” Conway said about the SEC’s examination of issues including bogus fees and improperly charged expenses.
Adena Friedman, chief financial officer and managing director at Carlyle, said on the call the firm doesn’t anticipate the increased SEC scrutiny will become an issue for Carlyle.
“We’re not big collectors of those fees, we try not to drive our business based on those fees,” Friedman said, referring specifically to transaction and monitoring fees charged to portfolio companies.
The SEC recently “had a visit” with Carlyle, and “we feel confident we’ve done things the right way,” Friedman said. The exact nature of the SEC’s visit with Carlyle is unclear. The firm had not responded to questions as of press time.
A majority of private equity firms have, for the first time, had to register as investment advisors with the SEC—something that was mandated by the Dodd Frank financial reform law enacted in 2010. Most firms had to register in the summer of 2012.
Since registration, the SEC has put together teams of examiners to dig into private equity firms’ valuation methodology, disclosure practices, conflicts of interest and marketing of funds.
Since registration deadline in 2012, about 1,800 private equity firms and hedge funds have registered for the first time, according to Mary Jo White, chairwoman of the SEC. Part of what comes with registration is periodic examinations by the agency.
The SEC even has developed special examinations for private equity and hedge funds, called “presence exams,” White said during a presentation before the House Committee on Financial Services.
“These ‘presence’ examinations are more streamlined than typical examinations and are designed both to engage with the new registrants to inform them of their obligations as registered entities and to permit the [SEC] to examine a higher percentage of new registrants,” she said.
Some of the common problems the private equity examinations have revealed include “misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser,” White said during the presentation.
The SEC’s goal is to examine 25 percent of new registrants by the end of 2014, White said.
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