As retail access to private markets accelerates, the Securities and Exchange Commission hosted a roundtable on Wednesday to discuss governance, valuation, and other considerations in the private markets. The SEC has a clear aim of promoting “retailization” of private markets.
My skepticism of this direction is not one of risk and valuation but of liquidity. Individuals may have differing skills for evaluating the risk and opportunity in making an investment. The “accredited investor” standard is not a great marker to determine this skill. Just because you have some assets or high salary, you don’t necessarily have the evaluation skills.
The “accredited investor” is an excellent market to determine your liquidity risk. If you make a high salary or have significant assets, you are less likely to have an unforeseen liquidity need.
The panels might have wanted to look at this headline: Record Numbers of Workers Are Raiding Their 401(k) Savings.
Back to the two panels.
Brian Day emceed the first panel on some of the issues with valuation.
Panelists:
- Cliff Asness, Founder, Managing Principal and Chief Investment Officer of AQR Capital Management
- Katie King, Partner, PwC
- John Finley, Senior Managing Director and Chief Legal Officer, Blackstone
- Marc Pinto, Managing Director and Global Head of Private Credit, Moody’s Ratings
Frequency of valuation and the judgment are the keystones. This panel, working at large firms with great governance, emphasized the process of valuation.
Product structure is key point. In the current market, you are seeing a big outflow of private credit in the form of redemptions. These structures have limits on redemptions. We have seen some managers waive limits.
Finley looks at the risk of volatility. He points out that long term investors should not be as concerned about volatility. In my view the question is whether the investor can commit to being a long-term investor. Back to my original point that the financial threshold of the accredited investor standard helps ensure that the investor can commit to the long term.
The summary of the panel is that retail investors will need to understand the products they are being offered and buying. They are more complex than buying a stock on the market.
The second panel was moderated by (1) Blair Burnett, Branch Chief, Investment Company Regulation Office, SEC’s Division of Investment Management and (2) Michael Republicano, Assistant Chief Accountant, SEC’s Division of Investment Management.
Panelists:
- Pete Driscoll, Partner, PwC
- John Mahon, Partner, Cleary Gottlieb Steen & Hamilton LLP
- Jamila Abston Mayfield, Chief Regulatory Services Officer, Comply
- Blake Nesbitt, Chief Investment Officer, Cliffwater
- Bryan Morris, Partner, Deloitte
This panel focused more on fund governance and especially 2a-5 challenges under the Investment Company Act. The panel really honed on ’40 Act funds. Process and documentation are key. Show the work. Disclose the process and risks.
I’m not sure any new ground was broken with the panels. Issues were discussed. The general theme, in my view, is to push the risk back on the investor to understand what the product is. This is classic conflict in the SEC’s mandate between protecting investors and capital formation. This current Commission is looking to push the needle away from protecting investors towards disclosure.