As the Securities and Exchange Commission’s comment period for its proposed changes to private equity disclosure and reporting requirements stretches on, many market participants are registering dismay. The time and resource burdens required to comply with real-time filings on portfolio changes are high, says global co-leader of Sidley Austin’s investment funds practice Elizabeth Fries, a reality that may tilt the playing field toward larger sponsors.
New potential filing requirements include a mandate to include information typically reported by money market funds, and to provide detailed reports on certain event triggers within one business day, up from the industry’s current annual reporting standard. Triggering events include a secondary transaction, fund termination or removal of a fund’s general manager and clawbacks.
The impact on smaller firms could be outsized. Take the standard quarterly report to investors. “A large private equity firm that already has a team? It won’t take them much,” to comply with even more robust reporting requirements, Fries reasons. “A smaller shop with maybe a controller and one financial officer? One of the costs of this proposal is it makes it more expensive to be a private fund manager.”
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
But disclosure has limited value given regulators’ limited reach.
“There’s also a question on the form PF, what do they do with this changing information?” Fries says. Some events triggering a filing can be legitimate signals to investors, but, she argues, “I think the question is disclosure to whom? The question is what does the SEC do about it? They don’t have armies of people to check what you’re doing in your secondary transaction, you need to get a fairness opinion from a third party, there’s a cost there, but most people get them.”
The SEC has ample time to digest this criticism of its proposed moves, among others.
–Brandon Zero
