The U.S. Securities and Exchange Commission’s approved its Private Fund Advisers rule in a split vote with the stated aim to protect private fund investors by increasing transparency and efficiency, leaving industry bodies divided in its wake.
To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance, the SEC announced on Wednesday. In addition, the final rules require a private fund adviser to obtain and distribute to investors an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
SEC Chair Gary Gensler in prepared remarks added, “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional or retail, sophisticated or not.”
The divided response between advisers and investors has been on full display.
The Institutional Limited Partners Association (ILPA) welcomed the final rulemaking following ongoing engagement with the SEC.
“We appreciate the intention of the SEC’s Private Fund Advisers final rule to promote greater governance, alignment and transparency across private funds,” said ILPA CEO Jennifer Choi. “Based on today’s [Wed. Aug. 23] meeting of the commissioners and our early understanding of what the rule encompasses, we’re heartened to see the rule take steps forward on fee and expense reporting and begin to address persistent conflicts of interest we’ve observed for some time, such as with GP-led secondaries transactions.”
ILPA’s membership spans over 600 member institutions representing over $2 trillion of private equity assets under management.
In a recent survey, ILPA found that 60% of LP respondents do not think their organization could meet its performance requirements without investing in PE — this is almost 4 times the amount of LPs (15%) who think their organization could meet its target without investing in PE. At the same time, most LPs disagreed (71%) with the notion that the PE industry is unconcentrated and that they have substantial flexibility to switch GPs if they are dissatisfied with the terms being offered.
The SEC in its new rule has prohibited all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. There is, however, a disclosure-based exception to the proposed prohibition, including a requirement to provide certain specified disclosure regarding preferential terms to all current and prospective investors. This leads to what terms are offered to the largest investor are offered to the smallest LP in the fund.
Private equity and venture capital industry leadership groups are still eyeing the potential outcome from the new rule.
“We are reviewing the final rulemaking to ensure businesses will continue to have access to critical capital,” said American Investment Council President and CEO Drew Maloney. “We have expressed serious concerns that the unnecessary proposal would reduce competition, limit choices for investors, and reduce returns for retirees across America.”
The American Investment Council membership includes the largest private equity firms including Advent International, Bain Capital, Blackstone and Carlyle Group.
The National Venture Capital Association in turn represents the smaller venture capital industry. According to NVCA President and CEO Bobby Franklin, venture capital funds invest over $240 billion in U.S. companies and venture-backed companies create jobs at eight times the rate of other businesses.
“As we review the SEC’s final rule, we will be focusing on its potential to stifle innovation and harm the economic environment for venture and start-ups, which would risk undermining opportunity for millions of American entrepreneurs and employees,” Franklin said.
Representing GPs from both the hedge fund and private credit side are Alternative Investment Management Association (AIMA) and Managed Funds Association (MFA), both of which expressed concerns over the new rule and pointed to the potential for litigation.
The MFA President and CEO Bryan Corbett, stated, “MFA continues to have concerns that the final rule will increase costs, undermine competition, and reduce investment opportunities for pensions, foundations, and endowments. MFA will assess the final rule and work with our members to determine the appropriate next steps to protect the interests of alternative asset managers and their investors, including potential litigation.”
MFA’s membership totals 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly $2.2 trillion across a diverse group of investment strategies.
AIMA for its part has 2,100 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $2.5 trillion in hedge fund and private credit assets.
AIMA CEO Jack Inglis, said that the Commission’s original February 2022 proposal contained a number of terms that imposed disproportionate burdens on private fund market participants. It hindered the industry’s ability to deliver value to investors “in a manner that balances risks and rewards in the ways investors are seeking.”
“We note that the final version of the rules reflects many of the concerns raised by AIMA and other industry stakeholders,” said Inglis. “However, the rules adopted today still contain several areas of concern for AIMA and our global membership, which includes fund managers and investors of all sizes, and the final text will need to be examined in detail to identify where these remain.”
While there are shared concerns for GPs across strategy, as there are for investors large and small, the short- and long-term impacts of the new rule are difficult to grasp as law firms prepare client memos and compliance departments rethink fundraising and reporting practices.
Alternatives Watch will explore the responses at leading U.S. law firms in a future article.
