ICYMI – New Report Critiques the SEC’s Private Funds Adviser Rule
“[The proposed rule] is likely to reduce competition in the U.S. private equity fund market and consequently decrease the number and array of investment opportunities available to investors.”
Earlier this week, the Committee on Capital Markets Regulation released an report examining how the proposed SEC’s Private Funds Adviser Rule (Proposed Rule or proposal) would limit the private investments that businesses, workers, public pension funds and retirees rely on. After a review of independent empirical evidence, the report concludes, “the U.S. private equity fund market is highly competitive and, rather than further enhance competition, the Proposed Rule would reduce competition in the U.S. private equity fund market.” (Page 41)
- “SEC Chairman Gensler’s misguided Private Funds Rule would impose a number of onerous new requirements and problematic prohibitions that would reduce competition, make it harder for new and emerging funds from entering the market, and limit choices for investors,” said American Investment Council President and CEO Drew Maloney. Over the past decade, the number of private equity firms has grown while fees have decreased. This trend has primarily benefitted investors, including millions of pension fund beneficiaries.”
The Committee on Capital Markets Regulation is a non-partisan research organization that, “provides U.S. and global policymakers with intellectual leadership on the most critical financial regulatory policy issues,” and is led by Harvard Law School Emeritus Professor Hal Scott. Copied below are some key quotes and takeaways from the full report:
- Private funds markets are highly competitive – “Part I [of the report] finds that the concentration in the U.S. private equity fund market is very low, far lower than that of industries in public markets and registered funds, and that the number of private equity fund advisers and funds is steadily growing. Both are signs of a highly competitive market and one that is growing increasingly competitive.” (Page 2)
- Investors in private funds have many options –“Part I [of the report] finds that the range of investment strategies available to investors in the U.S. private equity fund market is increasing at a significant rate. Finally, Part I evaluates barriers to entry in the U.S. private equity fund market finding that barriers to entry are low.” (Page 2)
- Fees are decreasing – “Part II [of the report] finds that the Proposed Rule misrepresents or omits key findings of empirical studies of private equity gross fees, which, contrary to Chair Gensler’s suggestion that the “2 and 20” fee model has remained static for decades, [the report] shows that effective management fees have declined to below 2% on average due in part to the prevalence of investor-specific discounts, and that effective carry is frequently less than 20% due to reduced or carry-free co-investment opportunities as well as investor-specific discounts. (Page 2) “Contrary to what the Proposed Rule suggests, private equity fund gross fees respond to competitive pressures and have in fact declined on average over recent years.” (Page 41)
- Private markets outperform public markets – “Part II [of the report] then reviews the extensive empirical evidence showing that private equity fund performance net of fees outmatches that of public markets, which is further evidence that the market for private equity fund advisory services is competitive both in terms of price and quality.” (Page 2)
- The proposed rule would reduce competition – “The Committee therefore concludes that the Proposed Rule operates from the false premise that the U.S. private equity fund market lacks competition and, rather than further enhance competition is likely to reduce competition in the U.S. private equity fund market and consequently decrease the number and array of investment opportunities available to investors.” (Page 3)
- The proposed rule would target women & minority owned firms – “The Proposed Rule would also increase barriers to entry to the U.S. private equity fund market with a particularly negative impact on women and minority-led private equity fund advisers.” (Page 41)
The report also received coverage in POLITICO’s Morning Money newsletter:
- “More pushback on the SEC’s private funds rule — Sam reports that the Committee on Capital Markets Regulation has a new report dinging SEC Chair Gary Gensler for failing to provide support for rule changes that would force private equity firms and hedge funds to give investors more information on fees and expenses.”
Last year, the American Investment Council sent a letter to the SEC calling on the agency to withdraw its problematic proposal. In the letter, the AIC outlined numerous concerns about the implications for businesses, workers and retirees who rely on the private funds industry for capital or investment returns.
