PE Tech Report

NEWSLETTER

Like this article?

Sign up to our free newsletter

SEC proposals: industry concerns and lobbying may slow implementation

Private equity fund managers are pushing back on plans to increase the amount of financial information they are disclosing, according to research by Private Equity Wire.

• New Private Equity Wire research shows only a third of survey respondents support new regulatory proposals around financial transparency and disclosure

• More fee transparency may favour smaller allocators who are often less able to negotiate fee discounts from GPs

• The impact of the increasing regulatory burden is likely to be slow and uneven, say industry sources, with opposition letters and extension periods already delaying SEC plans


Private equity fund managers are pushing back on plans to increase the amount of financial information they are disclosing, according to research by Private Equity Wire.

In an industry survey, conducted in May, only 36% of respondents said there needed to be stricter regulatory oversight of the private equity industry.

Among GPs, only 24% of respondents agreed with more regulation while lobby groups have called new proposals costly and unnecessary.

46% of respondents – which included GPs, LPs and service providers – had concerns about greater regulatory scrutiny of their business.

The findings featured in Private Equity Wire’s latest Insight Report, Clear Intent: Private Equity’s New Regulatory Landscape Awaits.

Since the financial crisis, regulation has increased for fund managers, but not by much. In 2011, US financial regulator the Securities and Exchange Commission (SEC) acknowledged that many private equity funds remained outside of the Commission’s regulatory oversight even though they managed large sums of money for hundreds of investors.

Tweaks to existing legislation have finally snowballed into a full-on review under the leadership of SEC chair Gary Gensler, who was appointed last year. Speaking at an industry event last November, he was reported as saying: “It is worth asking ourselves at the SEC whether we’re meeting our mission with respect to this important slice of the capital markets.”

His mission has become increasingly clear in the months since then.

SEC proposals earlier this year show a clear intent to increase the level of transparency and disclosure, for example in what fees GPs charge to their investors and how financial performance is recorded. According to some of private equity’s largest fund managers, this information is already disclosed in many cases – just maybe not in the way the SEC would like to see.

“When you’re not in these funds it’s very easy to point the finger and say how murky it looks,” said a large North American LP.

More fee transparency should favour smaller investors unable to negotiate discounts for higher allocations, but GP critics argue that a more standardised approach will increase their costs and limit their flexibility.

US-based private equity lobby group The American Investment Council wants the regulator to drop the proposed changes, describing them as intrusive and unnecessary. It believes the requirements could ultimately reduce returns for investors and limit their options for exit and liquidity in the GP-led secondary market. An editorial in the Wall Street Journal earlier this year described the SEC move as “an enormous power grab for an agency whose purpose is to protect mom-and-pop investors from fraud – not sophisticated investors from risks they willingly take”.

The impact of the increasing regulatory burden on GPs will be slow and uneven, say industry sources. The SEC has already extended the public comment period for proposals into mid-June and long response letters have been written in opposition (with some support from investors too). It may still take many months for approval and implementation.


Key implication | GPs: Fund managers that can demonstrate their transparency ahead of proposed SEC regulation have an obvious advantage over new and emerging managers with smaller back offices


 

Like this article? Sign up to our free newsletter

MOST POPULAR

FURTHER READING

Featured