The SEC Wants to Open Private Markets to More Investors

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Last week, the SEC proposed several changes aimed at expanding individual investors’ access to private-market investments.

What changes is the SEC proposing? 

• The SEC is looking to broaden who can qualify as an accredited investor. Under the proposal, CPAs, CFAs, CFPs, investment banking representatives, and licensed research analysts could qualify as accredited investors based on their professional credentials. An exam that investors could pass to qualify is also being considered.
• The SEC has also proposed loosening restrictions on when investment advisers may charge performance-based fees, potentially making it easier for advisers to offer private-market investments to retail investors.
• Under a separate proposal, certain closed-end funds would have more flexibility, including allowing monthly share redemptions and offering more share classes.

But critics worry about the risks of opening private markets to more investors.

Douglas Gillison and Suzanne McGee at Reuters explain:

• Private investments can be difficult to value and hard to sell quickly. Analysts also disagree on whether they consistently outperform public markets.
• Loosening restrictions on performance-based fees could incentivize advisers to take greater risks with their clients’ money.
• Industry groups argue the changes would give investors more choice, while critics say they could expose them to complex investments with higher fees and fewer protections.

Our take? We’ve been skeptical of the rush to permit issues to sell private investments to ordinary investors for a while now. Just read The Rise of the Working-Class Investor– and the Rush to Sell Them Private Assets.

The timing is awfully convenient. The SEC’s proposal arrives just as the industry is hunting for fresh sources of capital. Private credit, in particular, has been showing signs of stress, with rising defaults and little clarity over just how bad things really are (something we recently wrote about here).

Then there’s the closed-end fund piece, which may matter most of all. Under the proposal, interval funds could offer monthly repurchases without special SEC permission, while committing to buy back as little as 5% of their shares at a time. New funds could wait up to two years before offering any buybacks at all. And the SEC would scrap the requirement that these funds hold sufficient liquid assets to cover each repurchase offer, replacing it with a looser “principles-based” standard. Dechert published an excellent explanation, which you may want to read.

We’ve already seen how this plays out. This year, Blackstone, Apollo, and other big managers capped withdrawals from their flagship retail private credit funds at 5% after redemption requests spiked– in Apollo’s case, to nearly 17%. “Monthly liquidity” sounds great until everyone heads for the exit at once.

Some on Wall Street call it “democratization.” We call it access to a much bigger pool of investor money. Before you celebrate, ask who really benefits.