The Association for Corporate Growth released a report identifying the top compliance and regulatory concerns impacting small and midsize private equity firms. The results are unsurprising, but reinforce concerns.
The top five regulatory issues were found to be:
- SEC Examinations (75%)
- Investment Adviser Act Compliance (66%)
- Valuation Issues (58%)
- General Solicitation rules (54%)
- Legislation (tax reform, carried interest) (50%)
- Allocation of Fees and Expenses (50%)
The Investment Adviser Act compliance item included custody, recordkeeping and reporting. I’m not sure if that includes marketing limitations.
I was surprised that political contributions and the pay-to-play regulations only gathered 24.6%. That’s the one that keeps me up at night.
I was not surprised that SEC examination was the top vote-getter. An exam is a pain in the neck and there can only be bad things from it. No investor is going to make a decision because the firm had a positive exam. But you may lose a potential investor if you have a bad exam.
ACG also probed deeper on SEC examinations. Of the 158 votes for that concern, 57 had been examined. Many of the firms who indicated they were examined in 2012 and early 2013 indicated that their examiners were not familiar with the private equity business model. Those firms examined in 2014 generally indicated that their examination was conducted efficiently, and/or they comment that the examiners appeared familiar with private equity. Only one person commented that the examiners were more combative than necessary.
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