The SEC commenced a civil action and appointed a receiver for a private equity fund-of-funds that overstated revenue, performance and NAV. The SEC alleges that the fund sponsor booked revenue on loans to small and medium businesses upon the execution of term sheets but well before the closing of the loans or the receipt of loan repayment. The SEC also accuses the firm of recognizing investment banking fees before services were actually rendered. The unlawful revenue recognition practices continued over several years and overstated the NAV by more than $150 Million. Marketing materials falsely claimed the funds never had a negative performance month, and the PPM misrepresented that the NAV would be calculated in accordance with applicable accounting standards. The SEC obtained the appointment of a receiver to wind down the funds, the assets of which include several defaulted loans.
Private equity firms may not observe, or be aware of, revenue recognition practices and standards applicable to public companies. When you operate as an investment adviser fiduciary and market funds, the securities laws apply and you can’t just guestimate the revenue of fund holdings to calculate NAV.