Online brokers like Robinhood Markets Inc. and crypto assets might get the headlines, but the Securities and Exchange Commission’s parallel effort to drag private-equity firms and hedge funds out of the shadows will have far more impact on far more lives.
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Private equity especially has exploded in power and reach in the past decade. That’s why SEC Chair Gary Gensler is right to start demanding higher governance standards and more transparency from these firms. Any fund whose returns are destroyed by some extra reporting costs and duties shouldn’t be in business.
The industry has more than $4 trillion in assets under management and in the U.S., private-equity backed companies employ about 11.5 million people, according to data from the American Investment Council, a body that serves the interests of private equity. For comparison, America’s largest commercial employer, Walmart Inc., has about 2.3 million staff.
After a record year of dealmaking in 2021, where private-equity transactions accounted for nearly a quarter of the $5 trillion in total mergers and acquisitions, the industry’s influence will continue to grow. Buyout funds have about $2 trillion to spend if you include the debt they can use for deals. Some bankers think the first $50 billion buyout isn’t far away. The $34 billion takeover of Medline Industries Inc. last year was the biggest since the 2008 crisis and among the biggest ever.
The SEC has proposed rule changes to demand quarterly reporting to investors, annual audits and more disclosure of fees, particularly those that private-equity managers charge to the companies they own. It will also prohibit preferential treatment of some investors over others.
This hasn’t emerged from a vacuum: The rules are designed to combat wrongdoing the SEC has uncovered. Gensler has also complained about the difficulty of tracking and comparing investment returns across private-fund managers.
Industry bodies have been quick to complain that the SEC is overstepping its mark. The regulator should focus on protecting unsophisticated retail investors, they say. Both the American Investment Council and the Managed Funds Association, which represents hedge funds, say the changes would hurt the pension funds, endowments and foundations that put the most money into alternative asset managers.
Sure, the reporting and audit demands will impose some costs, which will detract from returns. Banning preferential treatment for some investors over others will no doubt be costly to those that get better deals. This includes things like lower management fees for some investors, easier or faster access to their money or more information on funds’ holdings. Those that don’t get the VIP treatment will cheer this change as will anyone with any simple sense of fairness.
But what really undermines the lobbyists’ complaints is that sophisticated investors themselves asked for help. A group that represents large investors, the Institutional Limited Partners Association, wrote to Gensler last October asking the SEC to force more disclosure of fees and charges.
Read the full article here by Paul J. Davies, Advisor Perspectives
