The U.S. Securities and Exchange Commission has started aninformal inquiry into private equity firms, asking for a broadrange of documents on how the funds value assets and who invests inthem.

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

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

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

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

The SEC said its “request should not be construed as anindication by the commission or its staff that any violation of thefederal securities law has occurred, nor should it be a reflectionupon any person, entity or security,” according to the 16-pageletter, which is dated Dec. 8.

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

Private equity firms pool investor money to buy companies, usingmostly debt, with the intention of selling them or taking thempublic later for a profit. They typically charge an annualmanagement fee of 1.5 percent to 2 percent of committed funds andkeep 15 percent to 20 percent of profit from investments.

The SEC in June voted to require private-fund advisers toregister with the agency, although publicly traded private equityfirms already provide detailed information in quarterly and yearlyfilings. The mandate forces 750 advisers to disclose “census-likedata” about their investors and employees, the assets they manage,potential conflicts of interest and their activities outside offund advising.

In October 2006, the government launched an informal inquiryinto club deals to determine whether firms were colluding to thwartcompetition and artificially hold down the prices paid forcompanies. While no actions were brought by the government, 11firms including KKR & Co. and Blackstone Group LP were sued thefollowing year by plaintiffs including a Detroit police and firepension fund.

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

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