Registration To Cost PE Firms Close To $1B This Year–Commenter

The full cost of having to register as investment advisers has really started to sink in with buyout shops. Olympus Partners puts the figure for itself at $500,000 to $600,000 by late spring, not counting annual costs beyond (see other estimates below).

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, buyout firms with $150 million or more in assets under management will have to register with the U.S. Securities and Exchange Commission (the regulations take effect this July). Effective lobbying earned venture firms a carve-out.

Registered advisers are subject to a host of requirements, such as having to develop and adhere to compliance manuals and to maintain employee trading records. Late last month, the SEC also proposed, in further fallout from the act, that registered advisers provide additional data, via a new Form PF, to help the newly created Financial Stability Oversight Council monitor systemic risk.

And the cost of compliance? Below I’ve taken excepts from comments submitted last month to the SEC by five private equity shops, most of which asked the agency to delay implementation of the registration requirement for a year in order to revisit whether the requirement makes sense.

Robert S. Morris, Managing Partner, Olympus Partners:

…compliance manuals, employee trading records, legal documentation, hiring of Compliance Managers and extra audits incur costs estimated to total $500-$600,000 that need to be incurred by us by late Spring in order to comply. The consequence of that expense 1) loss of jobs as we need to provide the money for those expenses and, 2) an assembly of information for the SEC about a business in which we do not operate, trading, will prove to be of no use in lowering systemic risk…The year [delay in implementation that we are requesting] will also avoid the large waste of money, 1600 PE firms x $600,000 = $1 Billion and the associated jobs that money would support…

David S. Lobel, Managing Partner, Sentinel Capital Partners:

…The bottom line for us is that in total we will have to spend between $500,000-$600,000 in 2011 and more than $375,000 per year thereafter for compliance manuals and oversight, employee trading records, legal documentation, and the hiring of additional compliance employees. To pay for this, we will need to cut employee costs elsewhere, and at the very least, we will have to postpone hiring productive professionals who can help us grow our business…

Andrew M. Bursky, Chairman, Atlas Holdings LLC:

…It remains unclear precisely what the direct cost of compliance will be, but our legal and accounting advisers tell us to count on $350,000 to $500,000 … the unintended consequence of Dodd-Frank on mid-market PE firms will be to reallocate our finite financial and human resources away from making and managing productive investments to administrative, registration and compliance matters, without creating any public benefit in terms of reducing systemic risk or enhancing investor disclosure…

David L. Schnadig, Managing Partner, Cortec Group:

…In order to satisfy the custodial requirement…we have been told that we will have to pay a custodian $10-$15,000 per year to “safeguard” these certificates. We have been told by our lawyers that it will cost us $75,000 to $150,000 to write a compliance manual…Furthermore, the [Dodd-Frank Act] requires we add a compliance officer (who has to be a senior-level executive), at a minimum annual compensation of $200,000 yet we do not engage in any activity the Act wishes to monitor. Finally, our counsel estimates a cost of $75,000 to $100,000 to document our efforts related to registration…

Peter C. Brockway, Managing Partner, Brockway Moran & Partners:

…We estimate that the meeting of the provisions of Dodd-Frank will cost our firm $350,000 – $500,000 a year, which will dilute our financial resources away from growing companies to needless regulation…