FEATURE: Watch your language

The private equity real estate industry is facing a number of regulatory changes in the US that will change the scope of how GPs manage their firms. One area managers will have to pay closer attention to is how language about fund performance is used in everything from pitch books to conference speeches.

This summer’s landmark legislation overhauling the US financial system included a requirement for private equity and real estate firms to register with the Securities & Exchange Commission.
 
On 21 July, President Barack Obama signed the Restoring American Financial Stability Act of 2010 into law. The law requires private equity and real estate firms with $150 million or more to establish formal compliance policies to outline how they would deal with potential conflicts of interest. Registration also means firms need to designate or hire a compliance officer, as well as face regular inspections by the SEC.

Among the many changes that required SEC registration brings, perhaps the least anticipated revolve around permissible marketing language. The language used in marketing materials and presentations must be scrutinised to assure that the firm is complying with SEC guidelines.

Managers will have to run a fine-tooth comb over all the marketing materials designed to solicit additional investors or maintain current investors.

These new requirements will add work for the investor relations, marketing and compliance teams of private equity managers.

We can’t say we’re a ‘top firm’ or make qualitative comments. You need to prove what you say with quantifiable data. John Malfettone, Oak Hill Capital Partners

“The marketing issues are huge,” says John Malfettone, a partner, chief operating officer at Oak Hill Capital Partners. “When you have investment and investor relations professionals going out with pitch books to conferences or client meetings, there are things you think are innocuous, but you can’t say them. For example, we can’t say we’re a ‘top firm’ or make qualitative comments. You need to prove what you say with quantifiable data. You can’t cherry pick deals; you can’t talk about just your three best deals. ”

Considering how much travel and the number of presentations given, the work is demanding.

“We’re not always in fundraising mode, but we’re constantly in investor relations/marketing mode,” said Stephen Hoey, partner, administration and chief financial officer at New York-based KPS Capital Partners. “My guys are always out there with a pitch book presentation and now I have to say, ‘I have to look at that closely now.’”

Some managers will seek outside help to address the increased communications work load. Pomona Capital, a registered investment advisor, hired a compliance consulting firm to review all marketing materials to make sure they comply with the SEC’s new guidelines.

“Our marketing department was impacted the most,” says Celeste Barone, a principal at Pomona Capital. “Every flipbook, every page of marketing that goes out, Pomona [the compliance firm] reviews for us. That’s one of the things we utilise them for.”
Other materials will have to be routinely reviewed including: all correspondence between the adviser and the investors (such as quarterly letters), operating agreements, private placement memoranda and other offering materials, subscription agreements, capital account worksheets, custodial statements and financial statements.

Along with new marketing challenges, private equity real estate managers will also have to designate a compliance officer, face regular inspections by the SEC and explicitly outline how to deal with potential conflicts of interest.

With regard to SEC inspections, private equity real estate managers will be subject to a review of all correspondence with investors and any marketing materials used to solicit investors, compliance with registration exemptions including Regulation D and a review of asset valuations.

Compliance does not mean the end of the world for private equity real estate firms, but it does mean a new set of tasks that firm managers need to get right.