On August 24, the SEC narrowly voted to introduce new regulation impacting private funds, including private equity, hedge funds and venture capital funds. The new rules, some of which are to be implemented in only two months’ time (October 23), are designed to “reduce opacity”. In other words, increase the degree of transparency when it comes to private funds and their fees, expenses and performance. The new rules are not retroactive – they only apply to new agreements – so existing contracts are unaffected.
The new rules compel private funds to perform an annual audit for each private fund, issue a quarterly fee, expense, and performance reports, and to disclose certain fee structures. Preferential treatment over redemptions and portfolio exposure is no longer permitted. It is worth noting that the regulation represents significant changes for an industry segment that has experienced double-digit annual growth rates for the past several years and currently sits at over USD 20 trillion in assets. More details can be found here: ia-6383-fact-sheet.pdf (sec.gov)
While several clauses in the original draft regulation (e.g. expanding funds’ legal liability, banning “side letter” special agreements) were not included, a number of prominent law firms and industry pundits call the new regulation a “sea change” for the industry and “the most significant overhaul of regulations in years.” Predictably, client advocacy groups lauded the regulation as a new era in transparency while the private fund associations were somewhat less enthusiastic.
What it means for investors in private funds
Regulation compelling private funds to be much more transparent when it comes to their fees, performance and incidences of preferential treatment is simply aligning alternative assets with mainstream assets. Alternative asset reporting is now in line with the type of reporting that other funds have had to produce for years.
Apart from the obvious increases in transparency, benefits include faster reporting cycles (e.g. 45 days for quarterly reports), standardized metrics for comparing funds and a more level playing field with respect to traditional funds. Many newer funds already report along these lines and the transition will be easier; others will have to ensure that they have the automated compliance and reporting infrastructure to provide the degree of transparency and information required.
One thing to note - the private funds incurring extra costs to comply will inevitably pass these costs along to the end client - you. Those funds with modern infrastructure should not have undue extra costs as they can seamlessly incorporate private funds into their compliance and reporting workflows. Do not allow funds with inadequate infrastructure send you the bill for their lack of foresight.
How SimCorp can help
When it comes to investing in private funds, SimCorp’s market leading alternative investment capabilities facilitate informed investment decision making and provide the functions/workflows to underpin your investment strategies in this area. For example:
- Use Intelligent Document Processing (IDP) to process unstructured private markets data. IDP is a machine learning based means of using a detect-select pattern to process accounting and investment data.
- Manage all assets - public and private - with integrated risk, compliance, trading, performance and accounting on a single platform.
- Comprehensive views of exposure leveraging industry leading look-through capabilities to streamline and automate the collection of underlying asset data for private fund investments
- On-demand risk management and forecasting utilizing our innovative Alternatives Strategy tool to anticipate change, reduce uncertainty and ultimately achieve your strategic goals.
- Empower users to focus on value-add tasks by outsourcing data collection in a cost-effective way to our specialist private market service provider Colmore.
Overall, we believe the new SEC ruling on private funds is a positive development for institutional investors. It will provide greater transparency and help to protect from unfair treatment. As the leading provider of investment management solutions for private market investors, we understand the complexities of regulatory requirements and are committed to greater transparency in the industry. As the only true cross-asset platform, we work closely with clients to streamline operations across public and private assets, providing clients with a unified operational platform and holistic overview of all their asset classes in near real time. This enables clients to exploit their data to the fullest, make more informed strategic investment decisions and adapt quickly to changes such as this new ruling from the SEC.
Seamlessly tailored client communications - whenever, wherever.
You need more than great performance and competitive pricing to stand out. That’s why more firms are taking a customer centric approach by focusing on improving their digital client engagement and automation of client communications.