SEC Punishes Private Equity Funds for Misleading Investors About Valuation

The Securities and Exchange Commission has expressed concern that “the current difficult fundraising environment can incentivize private equity managers to artificially inflate portfolio valuations” and mislead investors about fund performance.  Advocating increased scrutiny about the lack of transparency of private equity products, the SEC has penalized private equity funds for failing to employ and disclose appropriate valuation methodologies. 

On March 11, 2013, the SEC charged a pair of related private equity funds with failing to follow disclosed valuation policies when preparing marketing materials and quarterly reports for investors.  An SEC investigation found that Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials which stated that the funds’ holdings of other private equity funds were valued “based on the underlying managers’ estimated values.”  However, the portfolio manager of the Oppenheimer funds actually valued the funds’ largest investment using a methodology which differed from that employed by the underlying manager, the different methodology increased the internal rate of return from approximately 3.8% to 38.3%.

The SEC ordered the private equity fund managers to disgorge $2.27 million to investors, pay penalties of approximately $750,000, and retain an independent consultant to conduct a review of its valuation policies and procedures.  The charge demonstrates the SEC’s commitment to increase oversight of the valuation practices in the private equity industry.  The SEC emphasized that “valuations, while always important, take on greater significance during the period of fund marketing.”  The SEC also stressed the need for private equity firms to “implement policies and procedures to ensure that investors receive performance data derived from the disclosed valuation methodology.” 

In addition to increased scrutiny from the SEC of the private equity industry, the movement toward fair value accounting and growing pressure from audit firms and limited partners has pushed private equity and venture capital funds to provide greater support for the values assigned to their portfolio companies. 

Teknos Associates provides valuation services for emerging growth companies and their venture capital backers. Clients rely on our financial expertise, knowledge of technology markets, and high standards to deliver relevant and timely valuation reports and fairness opinions.