Compliance and Private Equity: An Oxymoron?

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2 Responses

  1. Your article is well written and accurate… whether or not the private equity companies agree. Retirement investors frequently fall victim to compliance failures in private equity investments. Plan assets in annuity backed insurance company separate accounts are often owned by the insurer as proprietary funds, and these funds will include private equity investments in the form of commercial real estate.

    In addition to the standard fees, the insurance company will charge fees based on incentive, performance, and other fees negotiated for services provided. One hidden fee is often an “investment and disposition fee,” assessed as a percentage of the sale and /or purchase of commercial property, and results in a diminished Gross Asset Value . When dealing in the hundred of millions of dollars of sales and purchases, these fees can add up quickly. This fact also accounts for the tendency for insurers to “flip” the private equity investments quickly.

    Another little known fact is that the investor owns “units” in the separate account, not shares. When the investor withdraws contributions out of the fund, the “unit” value is then based on “market value,” and is determined by insurance company management. Since these are proprietary funds, all realized and unrealized gains are retained earnings belonging to the insurance company, while unrealized losses are borne by the investor through a depressed market value.

    During the 2007-2008 financial meltdown, retirement investors lost trillions of dollars in unrealized losses that later generated realized gains for the insurance companies when the properties sold. This is where the Department of Justice needs get involved and prosecute the wrong-doers.

    Dennis Myhre, AIC

  1. March 11, 2017

    […] Volkov, a Washington, DC based attorney, recently posted an article entitled Compliance and Private Equity: An Oxymoron?   Mr. Volkov publishes a Blog called Corruption, Crime, and Compliance.  His website describes […]