The US Securities and Exchange Commission’s new rules on private assets have been greeted with headlines about the compliance costs for the industry, and about lawsuits challenging the new rules. How much substance is there in either?
Private equity has always been a notoriously expensive asset class for investors, thanks partly to various ancillary service fees as well as management fees. The new SEC rules were partly intended to enhance transparency around those fees.
It's also a notoriously lucrative asset class, which attracts investment bankers precisely because it's one of the few areas with higher earnings prospects than their already well compensated gigs. The amount of surplus money it throws off for funds is why people get involved in it. Extra compliance costs should hardly impact the success or dynamics of the industry.
According to figures quoted by the Financial Times, the SEC estimates that the new regulations, including for new compliance personnel, would cost the private markets industry just under US$2 billion. That's against some $11.7 trillion of total private markets assets under management as of end-June 2022, according to McKinsey.
The compliance costs, set against such assets, are hardly just a rounding error, but hardly crippling either, at around an average 2.35% of the assets of every fund. This may encourage consolidation among private funds, which isn’t necessarily a bad thing.
David Layton, chief executive officer of Swiss-headquartered private markets firm Partners Group, predicted in the Financial Times recently that the current landscape of some 11,000 private funds might consolidate to just some 100 key players in the next ten years. According to Layton, higher regulatory costs were just part of the pressures, including higher interest rates and fundraising challenges, pushing smaller players to merge.
Meanwhile, latest opinion is that the lawsuit launched by various private equity and hedge fund industry bodies, including private equity industry group the American Investment Council as well as the National Venture Capital Association and the National Association of Private Fund Managers, against the new SEC regulations, alleging regulatory overreach, is unlikely to delay implementation.
But at least another closed group of private partnerships can benefit from the fees involved: the lawyers, who might well end up reaping more than the 2.35% in Iegal fees if the case drags on long enough.
Think how much the private funds industry probably paid out to lobbyists and other causes to try to tweak the new regulations while they were still being formulated. An industry that has toasted itself for decades with the finest liquors is free - and able - to spend that much on sour grapes if it wants to.