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Perhaps it’s a natural outcome of a maturing and cyclical industry, or maybe the over-exuberant swing of the regulatory pendulum, but today’s private equity world is about as challenging as any. The combination of competition for deals, external pressure from investors, internal pressure for talent and succession, and the mentality of regulators all contribute to this onerous climate. While ongoing regulatory scrutiny may normalize in the coming years, the shift may merely mark a calcification of changes in the PE industry precipitated in 2010 by Dodd-Frank. One of those changes is the accountability and transparency now required for a fund’s fees and expenses.
Why do fund managers need to be concerned about the SEC’s current focus on fund fees and expenses? Not because of the dollars, though those may be substantial, but because it is fundamental to the trust between the GP and LP and to the regulator’s assessment of your firm’s culture.
Transparency means full disclosure, either when requested or through regular reporting. It’s generally easy to achieve, but the proverbial gray areas are what trip up people. PE managers should not take comfort in the fact that there are few SEC enforcement cases about fees and expenses, or that only the most egregious cases are brought—the ones any person with a modicum of common sense would have recognized as involving wrongdoing. It is a long and often expensive process to separate these situations from those where a regulator or investor simply questions an expense. That questioning, as well as your answer, may have a dramatic impact on your firm …
Julia D. Corelli is a partner with Pepper Hamilton LLP’s Corporate and Securities Practice Group and co-chairs its Funds Services Group. She concentrates in private investment fund formation, operations and compliance, private equity and venture capital investments, acquisitions, dispositions and financings of business enterprises, joint ventures and intra-partner dealings.