TOP STORY—Gensler has SEC taking closer look at PE, hedge fund fees - 21 January 2022

The SEC may be poised to look more closely at private equity firms and hedge funds as part of larger focus on market efficiency.

SEC Chair Gary Gensler, in a speech to an audience at the Exchequer Club of Washington, D.C., suggested that a wider agency focus on the efficient markets component of the agency’s core mission could produce a staff recommendation regarding, among other things, the fees and expenses associated with private equity firms and hedge funds. Gensler spoke on this topic several months ago in a speech that essentially telegraphed his announcement to the Exchequer Club that he had directed SEC staff to recommend ways the Commission can help to increase market efficiency via competition and transparency.

For Gensler, efficiency in this context means lowering the cost of intermediation for issuers and investors. Gensler said SEC staff may be looking at efficiency across a number of markets, including equity markets, Treasury markets, and non-Treasury fixed income markets. Gensler also said SEC staff would be examining issues around fund management, a topic on which he elaborated.

According to Gensler, little is known about the fees and expenses at private equity firms and hedge funds, which collectively he said have about $17 trillion in assets under management (AUM). Gensler suggested that this corner of the fund management category may generate $250 billion in fees and expenses annually.

Last November, in a speech to the Institutional Limited Partners Association Summit, Gensler broke down the private equity and hedge fund data a bit more granularly. For example, Gensler said that private funds have roughly $17 trillion in gross AUM, which translates into about $11.5 trillion in net assets. More specifically, he said that private equity funds have assets of $4.7 trillion (gross) and $4.2 trillion (net); hedge funds have assets of $8.8 trillion (gross) and $4.7 trillion (net).

Gensler told the gathering of limited partners that the SEC had learned much from data provided by funds on Form PF as part of the investment adviser reforms brought about by the Dodd-Frank Act. “I think it’s time we take stock of the rapid growth and changes in this field, as well as that decade of learning, and bring more sunshine and competition to the private funds space,” said Gensler.

Gensler also struck a theme he would return to in his Exchequer Club speech—the presence of entrepreneurs and other small business operators on the issuer side of the private funds market, and the public pensions and the workers those pensions represent on the investment side of the private funds market.

Gensler closed his remarks to the Exchequer Club by summarizing the goal of the SEC staff review of private funds’ fees and expenses: “If we can use our authorities to bring greater transparency and competition into that market, that helps portfolio companies on the one hand, and the pensions and endowments that are investing in that space on the other,” said Gensler. “Similarly, if we can drive efficiencies across other key sectors of the capital markets, that too would help issuers and investors.”

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