Addressing financial fraud in the private equity industry
Investors and advisers must bolster defenses against potential fraud
WHITE PAPER |
Today’s private equity investors are more vigilant than ever in the oversight of their investments. Rapid industry growth, coupled with economic pressures in recent years has produced greater competition for deal flow and more active investors. Moreover, U.S. regulators are now focusing their sights on private equity with new registration and disclosure requirements. For example, the Securities and Exchange Commission has hired former Department of Justice prosecutors, who are using techniques such as wiretapping, witness flipping, informants and undercover agents in their pursuit of potential fraudulent activities in the private equity industry.
With these heightened market pressures and regulatory risks, a rise in litigation is a strong possibility in coming years. As a result, both investors and their trusted advisers alike need to know how to identify signs of and respond to potential issues of financial fraud.
This paper addresses the more prevalent areas where private equity firms, brokers and other advisers may be subject to accusations of manipulation or fraud. Certain characteristics of the private equity industry may make it more susceptible to allegations of fraudulent activities, such as relatively long lockup periods, illiquid investments, complex transactions, broad partnership agreements, a perceived lack of transparency, inherent conflicts of interest and activist investors. Investors are scrutinizing the performance and activities of their portfolio managers, financial advisers, agents and the portfolio companies themselves. Limited partners are increasingly more critical of disclosure materials supplied by general partners and are demanding more detailed performance data.
Stakeholders must be prepared to respond to issues that may arise at both the fund management and portfolio company level. Stakeholders must also provide careful oversight of their outside financial advisers, brokers and other agents.