The meteoric growth of personal markets for the reason that global financial crisis has attracted the eye of regulators around the globe, a few of whom have responded with urgency. Interestingly, the U.S. courts recently struck down sweeping and controversial rules for personal fund advisers issued by the Securities and Exchange Commission (SEC).
But the matter is way from over. As the private investment sector enters a brand new era of not-so-cheap money, best practices and industry self-governance are much more necessary within the absence of strict regulations.
Increased inflation and better rates of interest have catapulted private markets right into a latest era and increased the importance of governance issues, Deane claims. These issues concern the connection between fund managers (general partners) and fund investors (limited partners), in addition to other relationships and potential conflicts of interest. Despite increased scrutiny, there stays a scarcity of public details about how private markets work, which Deane says may explain the wide disagreement over how private markets needs to be regulated.
The focus of this report is on private funds, including private equity, credit, enterprise capital, real estate and infrastructure funds – funds where redemptions are limited or not allowed in any respect.
Deane says he was motivated by a confluence of things, write the report, which is of value to investment professionals, policymakers and academics. It consists of two primary parts: the survey results and an introduction to governance-related issues. “The idea is to explain the results, put them in context to enable a deeper understanding of the issues based on what others have written, and provide talking points for experts and academics. We also spoke to investment chiefs of pension funds and leaders of industry associations. We reached out to a variety of sources to get an insight into what is happening.”
Inflating private markets
Because private markets aren’t public markets, it isn’t surprising that there is proscribed information available about them in comparison with public markets, Deane says. “So it’s understandable – but perhaps ironic – that we have polarized views. We have increasing regulatory interest in the US, in the UK, in the EU, in China, there’s more scrutiny of what’s going on, and yet we don’t have a lot of information about the market.”
Deane recommends that regulators needs to be cautious, if in any respect, in allowing greater retail access to personal markets. It could seem unfair to exclude retail investors, he notes. On the opposite hand, private markets lack a strong investor protection framework in public markets, he stresses.
US courts restrict regulatory authority
The SEC Private Fund Adviser Rules were overturned by the U.S. Court of Appeals for the Fifth Circuit on June 5. The court’s ruling will be found here: HereIn addition, Appendix 3 of the report, Dueling Court Briefs: The SEC’s Private Fund Adviser Rules, accommodates a summary of the opposing positions presented to the Court.
“The court struck down the entire rulebook, but it did so on the narrow ground that the SEC did not have the authority to adopt the rules. So the question remains whether the rules were a good thing, regardless of whether the SEC had the authority from Congress to adopt them,” Deane contends.
Now that the SEC rules have been lifted, it’s as much as the industry to indicate how private ordering can work. “Can it craft private ordering arrangements – including appropriate disclosures and resolving potential conflicts of interest – that benefit not only the fund sponsors and fund managers, but also the fund investors, who in turn, in many cases, have their own beneficiaries who are ordinary people – firefighters, teachers, police officers?”
CFA Institute Global Member Survey
According to Deane, “We asked a number of questions and had a wide range of response options – basically everything is great, everything is terrible, or somewhere in between. Most respondents chose the middle, moderate answer, both in terms of their opinion of how private markets work and their opinion of the regulatory and policy interventions needed.”
He says most survey respondents, including LPs and GPs, favor more regulation overall, but there’s one caveat: Regulation needs to be limited. “They want more disclosure and are willing to support regulations that require that disclosure. But they don’t go so far as to say you should ban a particular practice.”
Most respondents expressed a moderate view in assessing the private market’s problems and the necessity for further regulation. A narrow majority (51%) said private market practices may very well be improved but the issues weren’t significant. An analogous majority (52%) supported latest regulations – but limited motion. Respondents generally supported mandatory disclosures (or disclosure and consent) over outright bans. In terms of specific regulations, significant majorities supported requiring GPs to supply annual audits (79%), quarterly financial statements (70%) and a fairness or valuation opinion on all adviser-led secondary transactions (61%).
