Private equity: SEC seeks eternal sunshine of the spotless fee sheet

It hardly sounds like a billing for the world’s most equal fight: “Well-meaning bureaucrats versus the world’s savviest financial engineers”. Nevertheless the US Securities & Exchange Commission has proposed rules to let sunshine in on private investment advisers, including buyout groups and hedge funds.

Greater exposure to the light of day can only do the industry good.

The regulator wants private capital firms to disclose more about their fees and returns to the outside investors known as “limited partners”. The SEC also wants to ban controversial practices including “accelerated charges”, which may cover services that were never delivered because investments were sold early.

Private asset managers have avoided the deep scrutiny that Wall Street banks and retail investment funds have received. The industry maintains that its counterparties are sophisticated pension schemes and sovereign wealth funds. These supposedly know how to cut a canny deal, deserving less protection than bank depositors or retail investors in mutual funds. Corruption scandals have suggested that plenty of institutional investors are innocents abroad.

Private capital assets have soared to $18tn. Compression of returns from public market investing has forced institutional investors into private capital. Those backers seem largely satisfied with their outcomes. Some of the egregious practices of the industry may now get squeezed out. There will still be plenty of rewards to go around if performance keeps up.

According to the proposal, registered private fund advisers would be mandated to provide quarterly statements to investors stating returns as well as “a detailed accounting of all fees and expenses paid”. The plan was approved on Wednesday and now enters a public comment period,

The SEC singled out the “two and twenty” expense model for private equity and hedge funds. This describes charges for annual management and for performance above a set threshold. These have not followed charges on other investments downwards.

Hidden charges have been another problem. For example, Blackstone, the largest alternatives investment group in the world, settled with the SEC for $39mn in 2015 for some charging practices that limited partners in its funds were not briefed on.

Private equity and venture capital firms — less so hedge funds — can point to strong returns in recent years as evidence of a continuing golden age. As such, they have little to fear from proposed rules that should increase investors’ confidence in their product.

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