SEC Takes Close Look at Private Equity Funds

As Bloomberg notes, when a buyout fund exits a holding, investors often get their investment back first, plus a certain percentage of the profits, known as the hurdle. Once the hurdle has been paid, the fund manager can begin collecting carried interest.

The news service goes on to explain that investment agreements aren’t uniform among funds.

“In some cases a firm may waive upfront management fees and instead take an equivalent payout from investment profits. Under such arrangements, the manager may pay itself before returning the investors’ original contribution. The SEC is concerned that firms lack internal controls to track payments and ensure that the agreed waterfall plan is followed, the people said. One issue is whether the firms are taking more of the deal profits than they are entitled to, said another person with knowledge of the matter.”

While buyout companies have traditionally managed funds that pool capital from multiple investors such as pensions, endowments and wealthy individuals, Bloomberg concludes, large investors have increasingly sought their own separately managed accounts with better terms than the others.