How much information should the private equity industry have to disclose? Proposed rule changes would force funds to file regulatory updates on key events within a business day instead of annually, earning the ire of several critics. Triggering events include a secondary transaction, fund termination or removal of a fund’s general manager, and clawbacks.
“Not only would the current report obligations under the proposed amendments to form PF impose new, burdensome compliance monitoring and reporting obligations on the private fund industry,” write Morgan Lewis attorneys in a recent note, “But the investor reporting proposal would cause advisers to rethink how they charge funds for certain fees and expenses and how they report to investors.”
The implications aren’t limited to the advisory community; limited partners could well have a different view. As private equity continues to draw a wider spectrum of capital representing public pension endowments and a larger slice of retail investors, details of whether funds are involved in secondary deals or are removing key managers may well belong in the public realm in real time.
Secondary deals are often beyond the scope of limited partner agreements, limiting the transparency of transactions to LPs and potentially creating conflicts of interest. Deals can peg the value of a company to a level designed to inflate performance fees upon a future exit. Indeed, that potential conflict has spurred a wave of deals amongst advisors for poll position providing fairness opinions to de-risk such deals.
Combining advisory services with distribution was part of the rationale for Raymond James’ acquisition of private equity secondary market advisor and private fund placement agent Cebile Capital last year, the bank’s president of global equities and investment banking Jim Bunn told us at the time. So was the opportunity to broker more deals.
The proposed rules might well change the fee structures motivating such mergers alongside increasing transparency.
–Brandon Zero
