The SEC Opens the Doors to Private Markets; How Should Managers Prepare?
Private market strategies like private equity and private credit have largely benefited institutional investors over the past few decades, delivering increased diversification while posting outsized returns relative to public market investments. Over the past few months, the Securities Exchange Commission (“SEC”) has proposed several steps to expand private market access for individual investors.
In December 2019, the SEC announced its intention to modernize the definition of “accredited investor” in Regulation D under the Securities Act of 1933 – broadening the existing asset/income thresholds to individuals with professional certifications, “knowledgeable employees,” and certain family offices and their clients. In March 2020, an additional proposal was introduced to ease limits on crowdfunding, raising the fundraising ceiling from $1 million to $5 million.
The SEC’s moves to open private market access to a broader investor base has ignited industry chatter, with many private fund managers and startups asking how they should be preparing for increased interest
In response, we’ve outlined a few considerations for private fund managers:
- Investor education comes first. Having a Series 7 license or working at a private fund is an indication of investor sophistication, but neither factor indicates that an investor understands the mechanics and nuances of private funds. Once institutionally-focused, private funds must be prepared to educate new financial advisors and investors on specific nuances – from liquidity terms to capital calls and K1 tax reporting consequences. Private equity funds should also expect clients to push for more transparent, standardized methods of measuring investment return – an issue wrought with complexity that remains unresolved, even after years of institutional discourse.
- Telling your story will make all the difference. The competition for capital is fierce, and the increased pool of potential investors will only intensify this dynamic. With over 2,000 private firms in the market, separating wheat from chaff has never been more challenging, or more important. A firm that does a better job telling its story, describing its investment edge, and articulating its firm culture is more likely to succeed. Also, consider where do you stand on such oft-discussed issues as mitigating exposure to climate risk and incorporating ESG principles? It’s “open mic” time – and private firms looking to compete for capital need to start clearing their voices.
- It’s not all downhill from here. Increasing the pool of investors will also draw additional regulatory scrutiny. Particularly in an election year where presidential candidates are villainizing private investing and telling stories of how these firms are pillaging middle America, you must be ready to respond. What are you doing to articulate your purpose and contribution to society? How are you engaging with regulators and policymakers to ensure they understand your business and your value proposition?
The SEC’s proposed rule changes represent an opportune time for private funds to implement a holistic communications strategy- not only to benefit from the potential expansion in investor base, but also to protect against increased scrutiny that is likely to come with these changes.