The U.S. Securities and Exchange Commission has started an informal inquiry into private equity firms, asking for a broad range of documents on how the funds value assets and who invests in them.

Among issues regulators are examining is whether firms use inflated valuations to attract investors when marketing new funds, said a person familiar with the matter, who asked not to be identified because the inquiry isn't public.

The agency's Los Angeles office last year sent letters to several firms asking for details on fund investments and the valuation of assets, as well as communication with clients, according to the copy of a letter obtained by Bloomberg News. Firms were asked to produce the documents by the end of last year.

Private equity firms have come under scrutiny in the aftermath of the financial crisis, which forced firms to mark down holdings acquired during a three-year boom that ended in 2008 when the collapse of Lehman Brothers Holdings Inc. froze credit markets. Financial reform measures such as the Dodd-Frank Act have proposed more oversight of the firms' businesses.

An inquiry six years ago into whether firms drove down prices of takeover targets in so-called “club deals” didn't result in government action, although several firms were subsequently accused by private plaintiffs of conspiring to rig the market for leveraged buyouts.

The SEC said its “request should not be construed as an indication by the commission or its staff that any violation of the federal securities law has occurred, nor should it be a reflection upon any person, entity or security,” according to the 16-page letter, which is dated Dec. 8.

SEC spokesman John Nester didn't immediately respond to an e-mail sent outside normal working hours. The SEC's inquiry was reported earlier by the Wall Street Journal.

Private equity firms pool investor money to buy companies, using mostly debt, with the intention of selling them or taking them public later for a profit. They typically charge an annual management fee of 1.5 percent to 2 percent of committed funds and keep 15 percent to 20 percent of profit from investments.

The SEC in June voted to require private-fund advisers to register with the agency, although publicly traded private equity firms already provide detailed information in quarterly and yearly filings. The mandate forces 750 advisers to disclose “census-like data” about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising.

In October 2006, the government launched an informal inquiry into club deals to determine whether firms were colluding to thwart competition and artificially hold down the prices paid for companies. While no actions were brought by the government, 11 firms including KKR & Co. and Blackstone Group LP were sued the following year by plaintiffs including a Detroit police and fire pension fund.

The lawsuit, initially filed in 2007, claims the firms conspired to drive down prices in the largest leveraged buyout deals in violation of federal antitrust laws. U.S. District Judge Edward F. Harrington said in a ruling Sept. 7 that the plaintiffs, whose suit was initially limited to 17 transactions, can expand their investigation.

Bloomberg News

Instant Insights /

SEC Looks Into Private Equity Firms

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