An SEC official speaking at PEI’s CFO & COOs Forum last week indicated that the regulatory body would extend its review of the private equity industry to illiquid assets including timber and real estate, writes Nick Donato, editor of Agri Investor’s sister publication Private Funds Management.
Some 500 private fund professionals from around the globe braved the bitter cold in New York to attend the PEI CFO & COOs Forum last week.
Every year chief finance officers and chief operating officers make this pilgrimage to reflect on the industry and their own roles within it. And with so much to discuss – not least the threat of SEC enforcement cases and ever more grueling exchanges with auditors – there was no shortage of invaluable insights to ponder. In case you missed the event, here are a few of our favorites:
Report cards are in: the US Securities and Exchange Commission (SEC) finished its 2-year sweep of newly-registered private equity advisers, and as expected, plans to release an after-action report detailing its findings sometime in the coming months. Considering the commission found that about half the general partners inspected displayed some type of compliance failure during the sweep, the big question now is what it all means in terms of enforcement action. At the conference, SEC official Igor Rozenblit gave reason to think a flurry of enforcement cases aren’t necessarily on the way, saying these cases could take years to build and that the industry seems to have corrected some of its “more objectionable” deficiencies already. Also interesting was the revelation that Rozenblit’s crew of private equity specialists plans on branching out to other illiquid asset classes, presumably referring to real estate and other alternative strategies.
Limited partners are data hungry: yes, investors have been demanding more (and more granular) information in recent years, a trend every CFO can speak to, but it appears many are still falling short of the mark in meeting their expectations. At the conference, CFOs said they’re learning that LPs don’t just want, say, earnings before interest, tax, depreciation and amortisation (EBITDA), but unadjusted EBITDA and net income to gain an unfiltered snapshot of a company’s performance. Or put differently, they want to understand on a cashflow basis how the business is doing, which makes it harder for GPs to put a positive spin on the numbers.
Back-office balance: Limited partners are taking their love for team stability to the CFO and COO units. Team stability is one of those phrases we hear about to describe deal team members responsible for past success sticking around long enough to manage the next fund’s investments. At the PEI Forum, panelists said that same concept is now being applied to the firm’s operations and finance functions. LPs want to know that timely reporting and continued investment in IT systems will continue to be a priority handled by trusted personnel, before making another ten-year long commitment. “Reporting is a big litmus test LPs are now using to see how well you’re running the entire business,” is one how delegate put it.
Valuation tips: Always a favorite topic whenever a large group of CFOs gather under one hotel roof, valuation was given ample attention during the conference. One new valuation strategy discussed this year was that “holding at cost” a portfolio company valuation in the first six or so months of ownership is becoming a no-no for auditors and even SEC examiners. Instead, it should always be reported as the “fair market value of X’ or something similar, delegates shared.
Hopefully this will give you a useful flavour of last week’s proceedings.