The top regulator of the US investment industry called for a comprehensive reform of the fast-growing US$4.2 trillion private equity industry and proposed rules to ensure clearer disclosure of fund fees and performance indicators.
US Securities and Exchange Commission Chairman Gary Gensler (Gary Gensler) stated that he wants to simplify and standardize the disclosure of fees. These fees will be introduced as private equity firms introduce a new fee tier for consulting and processing capital market transactions for their portfolio companies. The disclosure becomes more and more complicated.
“It’s time for us to assess rapid growth and change [private funds],” Gensler said at a meeting in Washington on Wednesday that was arranged by the Association of Limited Partners, a trade agency that represents investors.
“I want to know whether the limited partners have the consistent and comparable information needed to make smart investment decisions,” he added. “I think we can increase the transparency of fees and expenditures and provide investors with funds.”
The call to increase transparency and strengthen investor protection comes at a time when many private equity firms are adding multiple levels to their standard management and performance fees. Additional fees include “monitoring” fees for portfolio companies, “transaction fees” for acquisitions or public offerings, and “consulting fees” for operating recommendations.
Gensler cites a recent Financial Times report that highlighted investors’ frustration with the additional costs of these levels, which may even include the cost of renting private jets.
Gensler said that the SEC’s review aims to reduce the overall cost of private equity funds because the private equity market is playing an increasingly important role in the entire US financial market. Private equity and hedge funds jointly manage approximately US$9 trillion in assets each year and charge approximately US$250 billion in fees.
“In general, this is very important for our economy and capital markets. Hundreds of billions of dollars in fees and expenses exist between investors and companies,” Gensler said. “More competition and transparency may bring greater efficiency to this important part of the capital market.”
Gensler also pointed to the performance of private equity funds and their relative performance to the stock and bond markets as a possible area for scrutiny. “[Basic] The facts about private equity funds are not so easy to obtain—not only for the public, but even for investors themselves. “
The chairman of the SEC also called for reforms to the so-called collateral letters that allow institutional investors to negotiate specific terms with private equity management companies—a practice that could result in institutional investors paying significantly different fees or having varying degrees of liquidity.
“This may create an unfair playing field [investors] Based on these negotiation terms,” Gensler said. “Research in this field shows that similar pension plans always pay different private equity fees. The range of charges may be large. “
Private equity managers are obliged to comply with fiduciary obligations to their clients. But Gensler pointed out that executives of private equity firms are often exempted or modified some of these responsibilities.
“Make no mistakes. The terms of the contract aimed at exempting the consultant from the federal fiduciary duty and [the law],” He said.
Igor Rozenblit, founder of the Iron Road Partners consulting firm and former senior SEC regulator, said that Gensler’s agenda “has the potential to change the private equity business forever.”
“Whether all these rules will be proposed and eventually implemented remains to be seen, but this is the broadest private equity agenda since the Dodd Frank Act,” he added. “There may also be unexpected and unforeseen consequences. Only time will prove the real impact.”