Time for private equity to focus on Form PF

With the initial Form ADV filing (or annual amendment) completed, many private equity firms should now turn to preparing Form PF -- an even more complicated form.

Last autumn, the Securities and Exchange Commission and the Commodity Futures Trading Commission jointly adopted Form PF -- the systemic risk reporting form for private fund advisers mandated by the Dodd-Frank Act. Form PF is designed to assist the Financial Stability Oversight Council in assessing systemic risk in the U.S. financial system posed by investment funds that are exempt from registration under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940.

Only SEC-registered investment advisers with $150 million or more of private fund assets under management, including private fund assets managed by certain of their affiliates, are required to file Form PF.

Most private equity fund sponsors will be required to make annual filings, the first of which is due April 30, 2013, for those sponsors whose fiscal year ends Dec. 31.

However, a "large hedge fund adviser" is required to make quarterly filings starting 60 days after its first fiscal quarter following June 15, 2012, which could be as early as Aug. 29. Thus, it is important for managers to confirm promptly that their funds' investment policies do not inadvertently make them "hedge funds" for the purposes of Form PF (and Form ADV).

A hedge fund is any private fund that (1) has a performance fee or allocation calculated by taking into account unrealized gains (that is, a performance fee using mark-to-market values instead of realized gains) other than those that take into account unrealized gains solely to reduce a fee or allocation to reflect net unrealized losses; (2) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); (3) may sell securities or other assets short (other than to hedge currency exposure or manage duration of interest rate exposure); or (4) is a commodity pool.

The second and third components of the definition could present issues for certain private equity fund managers, since fund organizational documents often do not explicitly limit the ability of the manager to engage in borrowing or hedging activities.

However, private funds falling within either of those two provisions would not be hedge funds for purposes of Form PF if (1) they do not actually engage in the relevant activities above the stated thresholds and (2) a reasonable investor would understand, based on the offering documents, that they will not engage in those activities.

Even so, certain private equity funds will still be considered hedge funds for the purposes of Form PF, including, for example, private equity funds that sell short in order to hedge a position in a publicly traded portfolio company. In addition, the definition of "commodity pool" may be problematic for certain private equity funds that, for example, enter into swap agreements.

As noted above, all private fund sponsors with more than $150 million in assets under management will be required to file Form PF, including information about both the adviser and each of the funds; however, large private equity fund advisers (that is, those that have $2 billion or more in assets under management) face additional informational requirements.

Among several other things, large private equity fund advisers are required to provide information on the indebtedness of certain "controlled" portfolio companies, including debt-to-equity ratios, bridge loans with lender identity revealed, and financial data concerning certain portfolio companies in the financial services industry and fund investments, which are broken down geographically and by industry.

Form PF -- like Form ADV -- will be filed online through the Investment Adviser Registration Depository. Form PF, however, will not be publicly available.

Kenneth J. Berman is a partner and Gregory T. Larkin is an associate in the Washington office of Debevoise & Plimpton LLP. Jaime Doninger Schechter is an associate in the firm's New York office. A version of this article originally appeared in the winter 2012 issue of the Debevoise & Plimpton Private Equity Report.