The document is a newsletter from PEF Services LLC, a firm that provides outsourced fund administration services to private equity funds. The newsletter discusses the increased regulatory scrutiny private equity funds now face from investors and regulators in the current economic environment. It also highlights how PEF Services helps funds improve transparency, reporting and record keeping to meet rising expectations of oversight. Finally, the newsletter announces a new partnership between PEF Services and an investment bank to provide additional services to funds.

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Insights December 2007 VOLUME 3, Number 1 | June 2009
Insights August 2007 FEATURING THESE STORIES:
Insights June 2007
Insights March 2007 FEATURE:
Insights January 2007 Control Freaks: Fund Management in the Era of Scrutiny
Customer Stories
HOT TOPICS:
Breaking News: PEF Services Forges Strategic Alliance with Griffin Financial Group
Course Corrections: Navigating the Troubled Economy
SBA NEWS:
American Recovery and Reinvestment Act Impact
TechNote 11 Clarification
Control Freaks:
Fund Management in the Era of Scrutiny
Are You Ready for Your Close-Up?
In the current state of the world's financial markets, investors are spooked, to put it
mildly. The news media are full of scandals, from Bernie Madoff to Stanford Investment
Group, as well as fund bankruptcies and bank failures. Returns on a wide variety of
investments are not meeting previous expectations and now investors are looking at
financial statements with a caution bordering on suspicion. U.S. government agencies,
along with governments around the world, are implementing new reporting rules and
threatening greater enforcement of existing rules governing financial institutions.
"There is definitely increased regulatory scrutiny on any type of entity that manages
money on behalf of other people," explains Ivan Knauer, a partner with the law firm of
Pepper Hamilton LLP and a former SEC enforcement lawyer and recently Vice
President/Managing Trial Counsel for FINRA/NASD. "When a situation catches the
attention of the SEC, the staff seems to have what I call ‘the Ponzi scheme
presumption,' that is, they act as though that's what's going on – until the company
under investigation can prove the negative."
Private Equity Council chair Doug Lowenstein recently told TheDeal.com that "the
private part of private equity's days are over." Knauer agrees that privacy is
endangered any time a regulator knocks.
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"Proving that you're not operating a Ponzi scheme is time-consuming, burdensome and
expensive, but unavoidable," Knauer says. "While private equity firms aren't subject to
the same level of record-keeping that registered investment advisors and broker-
dealers are, if the SEC comes knocking, they will be expected to produce the same
records," he warns. "The SEC won't accept less. Frankly, I believe that members of the
agencies' enforcement staff don't want to be accused of missing the next Bernie
Madoff."
The same attitude is prompting some limited partners to ask more questions of the
private equity funds they're invested in, according to Allen Greenberg, principal, PEF
Services LLC. The fund administration firm's team has a long history of helping Small
Business Investment Companies (SBICs) comply with SBA regulatory requirements, as
well as keeping small to midsize funds on top of their financial reporting. Last spring,
PEF Services was called in to help a fund whose LPs didn't feel the fund's management
team had been communicating in an open and timely manner.
PEF Services discovered the fund hadn't been sending out consistent records of
partners' capital accounts. So, partnering with the fund managers, the team delved
into seven years of the fund's accounts, analyzing, gathering back-up, and creating a
consistent methodology and schedules for these accounts, and then began
communicating their findings to the LPs on a regular basis. Almost immediately, the
frayed relationships were improved.
"Timeliness is becoming more important," Greenberg says. "Fund managers can't
afford to issue tax and financial reports late. A fund gets no credit for good information
delivered late. After all, investors, particularly institutional investors, need this
information for their own reporting. Some of the big pension funds, for example, are
pushing to get financials within days of a quarter's close."
After years of fairly good performance and relaxed oversight, how are fund managers
coping with this new era of scrutiny? Rather than waiting until LPs demand it, many
funds are being proactive and hiring outside help to manage their fund administration
and reporting functions, so they can keep their focus on steering portfolio companies
through these perilous times and finding new investors.
"One of the advantages of being a regulated entity is that you're required to keep good
records," Knauer says. "But even if you're not required to, you're going to have to
produce this documentation," if investigated. "If a fund company is subject to an
enforcement action, they should have their documents together in advance, as
comprehensive, accurate and up-to-date as possible," he adds. "Fund companies are
expected to provide information in a timely manner. A good, diligent outside
administrator firm is very helpful in keeping records organized, and gathering and
providing information in a timely manner."
Obsessive compulsive
Anne Anquillare, President and CEO of PEF Services LLC, agrees that regulated
companies like SBICs have an advantage in being prepared due to the demands of
government oversight. She was trained early in her career as a general partner of an
SBIC fund to be ready at any time for spot audits and to comply with SBA's layers of
red tape and disclosure requirements. Consequently, she doesn't mind being called an
obsessive compulsive. In the new age of accountability, it's become something of a
compliment.
Seven years ago, she and Greenberg recruited a few equally compulsive
fund-management pros and started SBIC Services, where they could apply their skills
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and experience to managing the administrative needs of other SBIC funds. By 2007,
the group expanded its services to small and midsize private equity funds of all kinds,
and changed its name.
"We have seen firsthand how investors are reassured when a general partner can
demonstrate that a fund's financials have been validated by an independent firm, not
beholden to the GP, using an established methodology that has worked for other
funds," Anquillare says. "GPs should have the outsourced fund administrator assist in
the preparation of the financial portion of their presentation for their LP annual
meeting. No matter how good a job a fund's management team has done, increasingly,
investors like to see that there's someone objective standing behind these numbers."
Having an outside firm keeping a fund's books in order not only reduces the burden on
the GP, it can even reduce the workload on a fund's audit firm. If a fund's reporting is
already in order, an auditor is less likely to want to dig deeper because of inconsistent
or incomplete bookkeeping. PEF Services has worked closely with a number of audit
firms, and knows what they're looking for. "Further," Greenberg adds, "better reporting
might just tip the balance for investors deciding between new funds."
HOT TOPICS
* Breaking News *
PEF Services Forges Strategic Alliance with Griffin Financial Group
PEF Services President and CEO Anne Anquillare announces a new joint marketing and
cooperation agreement with Griffin Financial Group LLC, an investment bank with
offices in New York, Philadelphia and the Mid-Atlantic region. PEF Services' clients will
now have a one-stop, cost-effective solution for a host of services from a team of
advisors who understand the needs of mid-size funds. Griffin is a FINRA-licensed,
full-service investment bank with a multi-disciplinary team of placement agents,
bankers and lawyers providing services to the private equity sector. They offer merger
and acquisition advisory, capital formation, and legal services, as well as strategic
consulting and private equity placement and related services. For more information,
see the announcement on PEF's website http://pefundservices.com/uploads/Griffin-partnership-
with-PEF-Services.pdf.
Course Corrections: Navigating the Troubled Economy
As with any period of prolonged, deep market correction, many private equity fund
managers find their attention being consumed by their portfolio companies' issues. But
times like these separate the wheat from the chaff – GPs who can stay focused on the
important things have an opportunity to emerge stronger.
Here's how to plot your course:
1. Have the discipline to keep looking at deals: If you have the resources,
assign this task to someone in your group who is better at managing for growth
and keep those who are better at capital preservation focused on existing
investments.
2. Keep talent: It's less important to address compensation issues now than
communications issues. Make sure your people understand the underlying value
in your portfolio companies and the fund's longer-term potential.
3. Strengthen ties with LPs: Just as you want more visibility into your portfolio
companies, your investors are also looking for insights into your fund. Head off
their concerns at the pass with additional communications on portfolio
performance and capital needs, and greater transparency overall.
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SBA NEWS
Impact of American Recovery and Reinvestment Act of 2009
The "Recovery Act" signed by President Obama on February 17 carries with it changes
to the Small Business Investment Company (SBIC) program. Specifically, Section 505
of the new law changes:
1. the formula for calculating maximum leverage,
2. the aggregate investment limitations related to portfolio diversification
("overline" limits), and
3. the percentage of financings required to be made in smaller enterprises.
In a memo dated May 4, SBA announced that new regulations based on these changes
are still in the works, but described the steps SBA is taking in the interim. For details,
visit http://www.pefundservices.com/uploads/SBIC-ProgramChanges-Under-
AmericanRecoveryReinvestmentAct-of-2009.pdf.
TechNote 11 Clarification
SBA's Acting Associate Adminstrator for Investment, Harry Haskins, announced on May
14 that SBA is instituting a temporary measure to provide additional sources of capital
to small businesses through this difficult period in the financial markets. Effective
immediately, SBA's Office of Investment will accept commitment applications for
Debenture Leverage with debt service plans that demonstrate the ability to service
interest from all sources, including Debenture Leverage, for follow-on financings to
portfolio companies initially financed prior to Dec. 30, 2008. The policy will be
reviewed every six months. For more details, SBICs are encouraged to contact their
SBA analyst or PEF Services. The memo is available on SBA's site:
http://www.pefundservices.com/uploads/SBIC-Technote-11-Clarification.pdf
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PEF Services LLC is a professional services firm that focuses on providing high-quality,
cost-effective outsourced solutions to meet the administrative needs of small and mid-size private
equity funds, including in-depth expertise in Small Business Investment Companies. Services
include financial reporting, capital management, distribution analysis, audit preparation,
bookkeeping, compliance, tax planning and ultimate wind-up of a fund's operations. PEF Services
also provides a full range of consulting services that address the complex operational and
regulatory decisions that fund managers will face during a fund's life cycle. To learn more about
how PEF Services LLC can help your fund, please call Anne Anquillare at 212-203-4681 or David
Gerogosian at 212-203-4682, or visit our website, www.pefundservices.com.
Our main office mailing address is: 155 Pompton Avenue, Verona, NJ 07044
Copyright © 2009 PEF Services, LLC. All rights reserved.
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