The Securities and Exchange Commission has launched an inquiry into how the private equity industry values its investments, how those investments are marketed, and other practices, the Wall Street Journal reported on Saturday.Recall that Dodd-Frank gave non-bank private equity underwriters (PEU's) a free pass. It required a study of PEU self regulation.
A GAO report stated it could be done, given changes in law and establishing a funding mechanism. The report did say:
SEC will assume responsibility for overseeing additional investment advisers to certain private funds on July 21, 2011. It plans to oversee these advisers primarily through its investment adviser examination program. However, SEC likely will not have sufficient capacity to effectively examine registered investment advisers with adequate frequency without additional resources, according to a recent SEC staff report.Private equity pushed their relative safety in the aftermath of the financial crisis:
Law firm Davis Polk offered the PEU take on Dodd-Frank:
Unaffiliated private equity firms would be subject to the systemic risk regime, only if designated as systemically important, which we expect to be rare in the private equity sector.
PEUReport questioned Carlyle's lack of systemic risk in the financial meltdown, given it made over $680 million in capital calls to CalPERS, a 5.5% owner, How much did Mubadala Development Company have to kick in to keep Carlyle afloat, given it held 7.5%? Did Mubadala pony up $925 million, the same capital call to investment as CalPERS?
Carlyle affiliate Boston Private Financial Holdings received $154 million in TARP funds. That capital injection aided the borrowing needs of "high net worth individuals." Adding the three capital injections, Carlyle needed $1.75 billion to navigate the crisis.
What if CalPERS, Mubadala or TARP said no, like China did with its derivative commitments? There'd be a PEU run, far more severe than investors dumping stakes at a discount to the likes of Goldman Sachs.
Reuters closed with a PEU plug:
The private equity industry has steered clear of recent trading scandals and was not at the core of the housing market's collapse.Carlyle Capital Corporation (CCC) failed in March 2008, six months before Lehman Brothers. It borrowed heavily to invest in mortgage backed securities. Carlyle walked away from capital calls on CCC, unlike CalPERS. That speaks volumes.
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Update: Dealbook weighed in on the SEC's PEU inquiry