On June 5, a US appellate court struck down a new set of rules imposing stringent disclosure requirements and compliance standards on private fund managers.

Despite the ruling, the debate over the regulation and governance of private markets rages on not just in the United States but elsewhere.

The majority of investment professionals support regulatory requirements around quarterly statements, annual audits, and an independent fairness or valuation opinion of adviser-led secondary transactions, a new report finds.

“Private markets can seem like a polarized landscape with often sharply divergent policy views. But our research reveals a missing middle ground among the investment professionals who make up our membership,” says Stephen Deane, senior director, capital markets policy, at the CFA Institute.

“A majority of members surveyed took a moderate position. While they believe room exists for improvement in private market practices and limited new regulation, they also say that problems are not significant, do not represent a market failure, and do not call for drastic new regulation. Their biggest concerns revolve around valuation, performance measures, and transparency, in particular better disclosure of fees and expenses.”

According to a global survey by the CFA Institute Research and Policy Center, 51% of respondents believe that while some practices could be improved, problems in private markets are not significant. Almost a quarter ( 24% ) say there are substantial problems or even market failures in private market practices, while 17% believe private markets function well.

Major concerns

Their top three concerns about private markets are the frequency and accuracy of valuation reporting; the frequency, comparability, and accuracy of performance measures; and the fairness and transparency of fees.

Many of the issues revolve around relationships between the limited partners ( LPs ), which invest in private markets, and the general partners ( GPs ), which are the firms that sponsor and manage private market funds. 

In the survey, 41% believe GPs dominate negotiations with LPs. But 38% disagree, saying negotiating power depends on a variety of market factors.

A majority ( 52% ) support new regulations for private markets, but only limited ones. Respondents prefer required disclosures over regulatory prohibitions.

A significant 70% of respondents support quarterly statements that include information on private fund’s fees, expenses, and performance; 79% support an annual financial statement audit of the private fund performed by an independent public accountant; and 61% support a fairness or valuation opinion of any adviser-led secondary transaction.

While GPs and LPs voice similar views on most of the survey questions, they differ most in their views on the disclosure of fees and expenses: 51% of GPs find such disclosures adequate, while 58% of LPs do not.

CFA Institute recommendations

Based on the survey’s findings, the CFA Institute report offers several recommendations for investors and policymakers.

For investors:

• As with any investment, perform due diligence and do not allow the fear of missing out to drive your decision.
• Coordinate between your institution’s investment and legal teams and give the latter adequate time to conduct a meaningful legal review before committing to a fund.
• Gain adequate information and do not accept excessive informational asymmetries.
• Be willing to walk away from a deal if the terms are too problematic.
• Keep up vigilance after you sign on to the fund: An attitude of “set it and forget it” invites norms that fail to protect investors’ interests.
• Address any potential internal agency conflicts within your institution.

For policymakers:

• Recognize that regulation has a legitimate role to play in private markets through establishing basic guardrails, even while allowing private actors to negotiate optimal terms.
• Focus on transparency, conflicts of interest, fees and expenses, and valuations.
• Preserve public market integrity; do not weaken investor protections in public markets in a misguided effort to attract more public companies.
• Be cautious about retail access. If you allow it, consider requiring retail investments to go through professional intermediaries that have the size and expertise to overcome information asymmetries and risks of adverse selection in private markets.