Mark-to-market rules to hit private equity industry

By Megan Davies

BOCA RATON, June 3 (Reuters) - The private equity industry is going to be hit by volatility in accounting for their assets, as newly adopted rules force them to mark down the value of their portfolios, high profile private equity bosses cautioned on Tuesday.

Mark-to-market, or "fair value" accounting, took full effect this year, requiring companies to value assets at current comparable prices.

The rules are known as FAS 157, which defines how companies should use fair value, and FAS 159 which lets companies elect to use fair value for certain assets and liabilities.

"In many instances the LBO funds are going to be forced to mark assets to market for first time," said Thomas H. Lee, president of Lee Equity Partners, a $7 billion hedge and leveraged buyout (LBO) firm. "Many haven't done this in the past."

"It will be brave new world out there," Lee, who left the buyout firm that bears his name, Thomas H. Lee Partners, in 2006. "Just as we see mark downs we will see mark ups. So the class itself will be very volatile."

Lee told hundreds of investors at the SuperReturn conference in Florida that it would generally be good that people got a better view of the accounts -- but there were also a lot of negatives.

Goldman Sachs' (GS.N) managing director and head of merchant banking, Richard Friedman, said the rules would have an impact on the industry.

"During rising periods in the market it will ultimately be fine," he said. "But you could have a company that is doing just fine that you bought in a heady period like the last 18 months, but the multiples of its competitors have come down."

Financier Wilbur Ross said on the sidelines of the conference that the accounting objective was worthy but it was daunting and challenging. (Editing by Tim Dobbyn)