BUSINESS
02/13/2012 02:13 pm ET Updated Feb 15, 2012

SEC Launches 'Informal Inquiry' Into Private Equity

The private equity industry is, in a sense, the last regulatory frontier of U.S. finance, immune, so far, from both the scrutiny and government oversight that has fallen on the banking sector.

That may soon change.

The Securities and Exchange Commission has launched an “informal inquiry” into how the industry conducts its business, according to The Wall Street Journal and The New York Times – notifying a number of P.E. funds late last year about the probe.

At issue in particular, according to the Times and the Journal, is how private equity funds value the companies they invest in. Private equity operates as a sort of private investment pool: Taking money from a variety of sources – pension funds, for example, or wealthy individuals -- and investing that cash in companies that aren’t publicly traded. The success of these funds is judged in part on how the companies they’ve invested in are performing. But because those companies aren't publicly-traded, their books are closed and the basis for these valuations can be opaque – with little outward check on how the private equity shops are judging, and reporting, their performance.

The SEC inquiry comes on the heels of a new rule imposed as part of the Dodd-Frank financial reform bill requiring that PE funds register with federal regulators, just as banks and hedge funds must. It also comes at a time when the industry on whole has received an unprecedented degree of public attention, in part because Mitt Romney’s background as head of Boston-based private equity shop Bain Capital has helped shine a new light on a world that was previously little-discussed.

As new regulations begin to restrict the types of investment traditional banks can undertake, some have begun to leave that world for the relatively unregulated private equity universe, as Reuters noted in January.

The open question is whether this new-found public and government interest in private equity is likely to lead to more regulation and a change in the way that business is done. And, of course, how the industry itself will react.

-

CONVERSATIONS