Pension Funds Push for More Disclosure Rules for Private-Equity, Hedge Funds

Retirement plans and other institutional investors are accepting a federal proposal that would force hedge funds and private equity funds to provide more information to investors.

College endowments, insurance funds and retirement funds serving teachers and firefighters are urging the Securities and Exchange Commission to go ahead with a proposed rule that would ensure employers Private fund investments receive annual audits and quarterly reports. The rule, which has been heavily criticized by private funds and Republicans, would also prohibit fund managers from passing on certain legal costs and limit the fund’s ability to protect itself from lawsuits.

Many pension plans are finding it difficult to meet their pay obligations to members, the result of decades of underfunding, excessive returns and unrealistic claims from unions. The simultaneous decline in stocks and bonds this year has only made matters worse. To compensate, many retirement plans are increasingly pouring their money into private market investments such as hedge funds, private equity funds, and private debt funds.

Private fund managers control more than $18 trillion in assets from retirement plans, sovereign wealth funds, endowments, insurance companies and family offices. They pool investors’ money and lock it up for years at private equity funds to buy and overhaul companies, private debt funds that lend money to companies, or other similar investment vehicles. They operate with much less government oversight than publicly traded companies or mutual funds.

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Support from investor groups is key to the SEC’s initiative, which has drawn strong opposition from Republicans, private equity firms and hedge funds. These critics argue that the proposed disclosure requirements are unnecessary because institutional investors are large and sophisticated enough to request any information they need from private funds.

State and local pension systems and other government investment funds control more than $5 trillion in combined assets. But they say that as capital has flooded into the private market in recent years, fierce competition among on-demand managers has put them at an increasingly disadvantaged position.

“A frequent refrain that [New York State Common Retirement Fund] Their request for improved fund terms beneficial to all investors was: ‘respectfully denied’, the fund’s chief investment officer wrote in a comment letter to SEC.

Private fund managers say the proposed rules will reduce returns for the very investors who are rallying their support. A letter from the American Investment Council, the private equity industry’s main trade group, said the “family” plan would “limit the entrepreneurialism, flexibility, and return on investment that make it difficult for investors to return to business.” Private equity becomes an increasingly attractive option.”

Pension funds, anxious to earn enough cash to cover the promises they have made to investors, hope that the potential returns are higher than that of hedge funds and private equity firms. offers will help close the funding gap and limit how often they have to take the politically unpopular step of increasing retirement contributions from state and local governments and their workers. According to data from Preqin and the Federal Reserve, Pension plan private equity ownership could equate to around half a trillion dollars.

SEC Chairman Gary Gensler recently said of the proposed disclosure: ‘If I knew you were paying one thing for a cup of coffee and I was paying the same price, that transparency would help shape the price in the market. capital market.’


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At the Ohio Public Employees Retirement System, where private equity accounts for 12.5% ​​of total assets and has outperformed the system’s broader portfolio, CEO Karen Carraher expressed support support for most aspects of the SEC proposal. It would reduce investors’ need to carefully negotiate fundamental disclosures from private funds and make it easier for them to spot self-interested behavior by fund managers, she said. private.

The chief investment officer of a major American pension plan told The Wall Street Journal that it took his bookkeepers about six months to extract and standardize information from private fund managers’ reports. Compare and track costs.

SEC Chairman Gary Gensler told reporters last month that the proposal is about efficiency. “If I know you are paying one thing for a cup of coffee and I am paying the same, then that transparency helps shape the price in the capital markets,” he said. The Democratic-controlled committee approved the proposal by a 3-on-1 vote in February, signaling a big chance that the final version would pass. The agency recently extended the comment period on the proposal to June 13 amid pressure from several lawmakers and industry groups.

Retirement funds earn less from their private equity investments than other types of institutional investors. According to an analysis of data from the Boston College Retirement Research Center for the largest 20-year plan year ending June 30, 2021, ending June 30, 2021, is 11.8 %. . The annual return of private equity funds tracked by data analytics firm Burgiss for the same period was 13.4%.

In a poll of 100 in-house attorneys representing private equity investors, 84% said they accept unsatisfactory terms in at least some of the funds they invest in. in, fearing that pushing for better terms would cause their institution to lose access to the fund manager. or be allocated a smaller portion of the fund. More than a third of attorneys polled come from public pension funds.

“Here’s what you’re hearing from investors: ‘We’re worried about losing our allocation, so we don’t want to be the wheel that rattles’,’ said William Clayton, a professor at the school law firm Brigham Young University, who conducted the poll said at an October conference and made the data public in a comment letter.

In addition to imposing disclosure requirements, the SEC’s proposal would prohibit private fund managers from charging investors for the costs of regulatory checks, investigations, or payments and penalties. SEC. And it would ban contracts between institutional investors and private fund managers in which investors agree not to sue for certain types of negligence and breach of fiduciary duty. Florida law prohibits some such contracts.

Jeremiah Williams, who represents investment managers at law firm Ropes & Gray LLP, co-wrote a letter of comment opposing some of the bans. He said immunity from low-level lawsuits can help managers release risk leading to higher returns.

Mr. Williams, who is also a former member of the SEC’s enforcement division. ‘ property management unit, said in an interview.

Another provision in the SEC’s rule would target private fund managers who use debt rather than investors’ cash as an initial source of capital for new business ventures, a method that could makes profits look higher than they are now. The rule would force managers to calculate returns over a longer period of time that begins with borrowing, not just over a shorter period of time that begins with an investor’s withdrawal.

Write letter for Heather Gillers at heather.gillers@wsj.com and Paul Kiernan at paul.kiernan@wsj.com

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https://www.wsj.com/articles/pension-funds-push-for-more-disclosure-rules-for-private-equity-hedge-funds-11654507801?mod=rss_markets_main Pension Funds Push for More Disclosure Rules for Private-Equity, Hedge Funds

Edmund DeMarche

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