Updated with comments from Ropes & Gray below.
A bill was introduced in the Senate last week that would require hedge funds to register with the SEC. On closer look, we realize it applies to more than just hedge funds, as pointed out by our friends at Ropes and Gray. If passed, the bill also would regulate and require disclosure from all PE and VC funds with $50 million or more in assets.
Of course, Schoolhouse Rock has taught us that a bill is just a bill (and not a law). This proposal, introduced by Senators Carl Levin (D – Michigan) and Chuck Grassley (R – Iowa), could go through a lot of changes before it actually gets passed. But as is, it’s bad news for those of us who like our private equity private.*
It means that buyout funds will have to disclose the names and addresses of all of their investors and the value of the assets in each of their funds. Likewise, the registration would require anti-money laundering programs, the filing of an annual information form (which would be publicly available), the maintaining of books and records in accordance with SEC rules and cooperation with SEC examinations or requests for information.
The information required in the annual form is relatively innocuous—names of investors and how much they invested, the fund’s ownership structure, minimum investment required, and any financial institution affiliation. Except, of course, the “current value of the fund assets” part. That would do well to introduce the “J-curve” concept to the outside world.
But does the law require a company-by-company valuation? That would be the nail in the fundraising coffin for some firms, while boosting the status other firms with a strong performance but no brand name. I spoke with Daniel Evans, the author of Ropes & Gray’s article on the piece, who said that while the language of the bill is unclear, it is generally thought that no, the valuation will be an aggregate number that is an overall valuation. Evans said that, from his conversations, private equity firms won’t be excited to comply with such legislation but won’t be hurt by it too much.
This information will now be made public, but how much will it matter to the general public, who do not have any direct “skin in the game”? I think there could be a resurgence of public outrages over things like returns and carried interest. Surely there are plenty of unreported situations like the Mervyns debacle, in which Cerberus Capital made money on the real estate despite the failure of the company. That’s one that got leaked to the press, but there are probably plenty where that came from. That situation did not help private equity’s supposed “PR” campaign, and with the curtain pulled back from annual reports, those deals could get much more attention and require a lot more explaining from GPs.
Since the bill has gotten attention mostly for its emphasis on hedge funds, it would seem that the effects it has on PE and VC may be unintended. One thing Evans said his peers seem unclear on is whether the disclosure of LPs is what the bill intends. Rather, he said, it seems they are more concerned with disclosure of the owners of the firm, which is not the shareholders of the fund but the managers–the GPs.
But before you get worried, there is one thing to consider. The filings are required on a fund-by-fund basis. Meaning, funds smaller than $50 million have nothing to worry about. That’s a small population of PE firms, but it might help a few venture firms.
*I personally would love a little more disclosure around here. But that’s the reporter in me speaking.