Whilst much has been debated about the perceived merits and pitfalls of the SEC’s proposed disclosure rules for private investment firms, following questions from a number of allocator clients we wanted to weigh in with our views around the data collection and reporting elements of the proposals.
The SEC is proposing the new disclosure rules, aimed at private fund investment advisors in a move to provide transparency to investors around fees and performance, when investing in the previously opaque private investment funds sector.
The private equity sector has long been a complex and opaque sector, with lines between GPs and LPs blurry and preferential fees for select LPs as standard practice. The lack of mandated reporting has meant these practices have been largely unchecked. Despite repeated assertions from the sector that private equity poses no systemic risk, the asset class has amassed over $4.5tr AUM globally and has been the focus of recent increased regulatory scrutiny. Private equity has moved from an almost unregulated asset class favoured by family offices and high net worth individuals, to one which is an attractive and popular proposition for institutional investors, lured by the prospect of strong returns. The resulting increased exposure to private markets likely poses systemic risks that the regulator is trying to detect and mitigate in order to protect the market and investors. Due diligence across the private equity and private investment fund sector has been more challenging than other sectors, something the SEC is seeking to address with the proposals.
The proposals center around private investment advisers providing transparency to investors around costs and performance. Additional rules prohibiting certain sales practices, conflicts of interests and preferential treatment are also proposed. Reporting deadlines would also be reduced when issues or thresholds are breached, bringing the timescales down from quarterly to 1 day. In addition, fund managers are required to prepare quarterly statements outlining fee structures, fund performance, expenses and compensation, then distributing to investors within 45 days of quarter end.
Private funds would also be subject to annual, independent audits to check and monitor asset valuations.
Our institutional investor clients have some concerns about the raft of additional data they are going to be receiving every quarter. How will they integrate this into their current Dasseti environment and ensure the data is standardized and comparable? How will they review only new information, not trawl through multiple repetitive statements.
Dasseti uses document scraping technology that rapidly reads and converts report data and attachments and using automatic flagging based on key words or phrases, to identify issues or changes. Investors can take the manual work out of data analysis, quickly organizing and analyzing via lists, charts or custom views that make most sense to the reader. Version control means all data is recorded but the most current can be selected, with a full audit trail that meets regulatory requirements.
Under the proposals, GPs and hedge fund managers operating in private markets will see a significant uptick in investor reporting requirements. The SEC is deliberately leaving managers to self-report to avoid prescribing unnecessary reporting. The mandate is to use a structured, machine-readable format and provide some standard data but there is flexibility and a degree of autonomy for the GPs and managers according to the specific funds they are reporting on.
The SEC proposal states that GPs and managers must make it easy for regulators and investors to consume the information they provide. At Dasseti, our aim is always to reduce the time spent on non-value adding tasks. Our centralized platform uses a variety of standardized output formatting, already used by institutional investors and in line with current regulatory reporting requirements. Dasseti is a digitized distribution platform for GPs and hedge fund managers to share data around fees and counterparties. Using Dasseti, GPs and managers can automate alerts and distribute quarterly statements, with version control and a full audit trail. This reduces paperwork whilst meeting demands for an increased (digital) paper trail. A platform like Dasseti makes it easy to demonstrate compliance to the regulator, and takes the manual work out of investor reporting.
On the whole, the Dasseti team, and many of our LP clients welcome the proposals and believe that they don’t have to prove as onerous as predicted.
Provided LPs have a system for processing the influx of information from GPs in a comparable format, and GPs and managers have a distribution platform that allows them to share the information with investors regularly and regulators when required, the proposals will bring an additional level of transparency to private investments.
We would, however welcome prescribed wording on reporting formats. A standardized format such as XBRL, HTML, JSON or XML that is machine readable and allows marginal change recognition can bring huge gains for LPs when comparing data sets.
If you are an LP or GP and would like to discuss the proposed disclosure regulations in more detail, or to find out how Dasseti could support you in meeting these requirements should they be adopted, get in touch with the team here.