Dropping the cloak and dagger act
By Paul Mackintosh - 10/09/12
Amid all the private equity-bashing in the US, in the context of the Romney presidential campaign and Mitt’s Bain Capital past, it’s good to be able to comment on a more favourable development in the PE heartland. The Securities and Exchange Commission (SEC) has approved changes to the rules governing general partnerships in the US that at last will allow funds to market their funds openly, through direct advertising. Although this likely does not herald a stampede of eager retail investors into PE funds, lured by dazzling ad speak, it will reduce the mysteries surrounding fundraising very slightly.
The amended Securities Act of 1933 made general partnerships’ business-friendly exemption from Federal securities registration conditional on prohibition of “general solicitation and advertising” of a new fund, including “any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio”, or “any seminar or meeting whose attendees have been invited by any general solicitation”. Obviously, this limited publicity around new funds, thereby enhancing the role of placement agents and exacerbating the closed character of the fundraising circuit: solicitation was legitimate only where a “substantial and pre-existing relationship” existed. This even restricted GPs’ usual advertising and PR activities during a fundraising period. It also offered lawyers and other advisors an added income stream from the fundraising process, as they guided GPs through the intricacies of what was permissible. And non-US funds wishing to attract US investors were also required to comply with the restrictions.
The new rules were promoted by the Jumpstart Our Business Start-ups Act (a.k.a. the JOBS Act); indicating that some US legislators remain in favour of private equity as a business creator and builder. They also carefully define the “accredited investor” whose money the firms are legitimately allowed to put into their vehicles – at least US$200,000 income, for one criterion, offering protection (or exclusion, if you prefer) for retail investors. So they are unlikely to shift the nature of the limited partner (LP) base substantially. They do, however, remove at last this increasingly dated restriction that had shaped the nature of the industry and, some would say, encouraged some of its less healthy tendencies towards secrecy and exclusivity. There was little commonsensical justification for the rule, and its distorting influence far outweighed any benefit from it. And arguably, the more that private equity operates like a normal, transparent and accountable business, and the less it operates like a bizarre arcane discipline, the better for all concerned – except perhaps for certain categories of advisor.