On August 23, 2023, the U.S. Securities and Exchange Commission adopted the most extensive reforms for the private investment industry since the Dodd-Frank Act of 2010. The reforms include many noteworthy aspects that we, and the industry, are still reviewing closely. Below are a few key changes:
- Fee & Expense Transparency. The new rules require private fund advisers to provide investors new quarterly statements with performance, fees, and expenses in a prescriptive, table format. They also require funds to undergo an extensive annual audit.
- Adviser-Led Secondaries. The new rules require private fund advisers to obtain and distribute to fund investors an independent fairness or valuation opinion in connection with an adviser-led secondary transaction.
- Preferential Treatment (Side Letters). The new rules require that all future side letter terms offering preferential treatment to certain investors be regularly disclosed. They also prohibit preferential redemption provisions, as well as portfolio holdings information rights, unless offered to all other investors.
- Restricted Activities. The new rules restrict private fund advisers from charging regulatory, examination, or compliance fees or expenses to the fund, unless the charges have been disclosed. They also restrict a fund from charging fees on a non-pro rata basis, unless the allocation approach is fair, equitable, and disclosed in advance.
- Grandfathering Existing Arrangements. The new rules exempt agreements related to Preferential Treatment and Restricted Activities entered into prior to the Compliance date. As a result, they do not need to be renegotiated.
The institutional private investment market had the last year and a half to absorb and react to the signaling from Chair Gensler’s SEC and will have another 12–18 months to comply with the new rules, providing all of us time to monitor implementation approaches and how the market adjusts, including legal challenges to the rules. GPs great and small are now accountable to provide a uniform level of transparency and information to their LPs, which we view as a net positive. There may be additional costs to provide it, some of which may overly burden less resourced GPs or even be borne by LPs, but overall, giving investors more information to incorporate into their initial and ongoing investment assessment is a constructive development. Anecdotally, while larger LPs have historically benefitted more from preferential treatment, we believe the diverse LP ecosystem stands to benefit from the increased disclosure of side letter arrangements going forward—it enables uniform visibility into topics important enough to negotiate—and expect its impact to be more observable in future fundraising exercises. Time will tell.
Andrea Auerbach, Global Head of Private Investments
Mike Coppens, Head of Business Risk Management
Chad Tyson, Managing Counsel