PESP expressed strong support for the Securities and Exchange Commission’s (SEC) proposed rules that would provide investors with necessary details on the fees, expenses, returns, and compliance records of private funds they are invested in or are considering investing in. It would also prohibit certain practices and fees levied by investment managers that create misaligned interests with investors.
PESP observed these rules will benefit investors and the public alike. The proposed disclosure requirements would be a welcome change to the existing information and power imbalances between limited partners and fund advisors.
Investors are often left in the dark about basic information pertaining to how their investment in any given fund is being managed. This unfairly creates information asymmetry between fund advisors and their investors.
With these disclosures, investors will be better able to monitor and make informed decisions regarding their investments. As many institutional investors in private equity funds are public pension systems, disclosure of the aforementioned information to such investors is in the public interest as well.
This proposal would also protect portfolio companies from predatory wealth extraction, which also affects such companies’ employees, and the consumers, clients or patients that they serve. The proposal explicitly prohibits charging investors and portfolio companies for (1) accelerated monitoring fees, (2) costs related to governmental or regulatory investigations, (3) compliance expenses and (4) costs related to obtaining external financing. These fees and expenses are not related to services provided to investors but rather as the SEC correctly characterizes them “compensation schemes that are contrary to the public interest and the protection of investors” and should therefore be covered by the fund manager, not the investors.
PESP also urged the SEC to consider requiring the same climate disclosures that were proposed for publicly listed companies to apply to private fund advisors through Form ADV. The financial and physical risks from climate change and the energy transition are relevant to investors in private markets just as they are to investors in public markets. In fact, the risks for private market investors may be greater given the illiquid nature of closed-end investment vehicles and the limited visibility investors have into the holdings of private funds. In the absence of disclosures, investors do not have adequate information about the risks and extent of their capital’s exposure to fossil fuels and other sectors with significant greenhouse gas emissions.
These proposed investor protections take on greater importance given the growth of private markets, which has reached $18 trillion in gross assets per the SEC. Research by Vanguard also showed that “the asset size of the private equity market has been gradually growing on an absolute basis and relative to the public equity market over the last 20 years.” Over a corresponding timeframe, the number of companies backed by private equity has grown – McKinsey found that the number of US-private-equity backed companies doubled to 8,000 between 2006 and 2017 – while the number of publicly traded firms dropped to 4,300.
Read PESP’s full comment here.