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Need To Meet

Another way that SEC registration is likely to bite buyout firms: More frequent calls on their investors to draw down management fees. Won’t that be fun?

In addition to the various reporting requirements and compliance obligations, the Dodd-Frank financial reform law imposes a new set of rules on firms that hold client funds in their own accounts, said Steven Millner, a managing principal at the service provider Gen II Fund Services LLC. “If you hold client money for more than six months, you have to have your management company audited and have a certain amount of capital.”

A large share, if not a majority, of buyout shops make such capital calls twice a year, Millner said. “That falls right in the crosshairs of this rule.”

In fact, until recent years, buyout shops made capital calls quarterly for the 2 percent management fees that are customary in the industry for funds under management. But that changed, and the way Millner described it, it was as much for the convenience of the limited partners as it was for the benefit of the fund managers. “It’s a pain in the neck for LPs to process these capital calls, so everybody went to semiannual because it was less burdensome. Now with this regulation, you’ll see people will have to go back to quarterly.”

Millner and his partner, Norman Leben, the other managing principal at Gen II Fund Services, formed their company in 2009 to provide outsourced financial services for buyout firms. By handling the books and records for the fund managers, producing financial statements for LPs, calculating IRRs and return multiples, computing waterfall payments and the like, they free up the buyout shops to focus on the work they do best, buying and building private businesses.

The pair have been at this work for more than 20 years each, and while there are other boutique competitors in the market, they said their biggest competition is from the big custody banks, such as State Street Corp. and JPMorgan Chase & Co. In fact, their previous company, BISYS Private Equity Fund Services Inc., was sold to Citigroup Inc. in 2007, part of a $1.4 billion deal that Citi made for Bisys Group Inc. at a time when the New York banking company was pushing into alternatives, such as its acquisition of Vikram Pandit’s hedge fund, Old Lane Partners LP.

While registration might seem as if it would create new business opportunities for a service provider such as Gen II Fund Services, the men sounded as sour about the new rules as the general partners do. Much of the law requires an independent third party to perform the new work; as more of an agent for its clients, Gen II Fund Services wouldn’t be eligible to take on the new business. But the company has looked at some possible new services, such as monitoring the LPs against the chance an investor would show up on an anti-money laundering list such as the OFAC list maintained by the U.S. Treasury Department’s Office of Foreign Assets Control.

“They’re taking a sledge-hammer when they need a fly-swatter,” Leben groused, arguing that the government is cutting and pasting rules from other financial industries and applying them to the buyouts business. But he is not optimistic about fixing the reform. “If I were a betting man, I wouldn’t be betting on repeal. Maybe modification, but not repeal.”

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