Private equity and hedge fund groups won a victory in New Orleans as the Fifth Circuit US Court of Appeals ruled in favor of tossing out a transparency rule introduced by the Securities and Exchange Commission. This rule required these groups to issue quarterly performance and fee reports, perform annual audits, and treat all investors equally. The ruling has caused jubilation among financiers and concern among progressives and consumer protection groups.
The decision in New Orleans highlights the growing partisan nature of the US judiciary, with two of the three judges in the case appointed by Republican presidents. This ruling could open the door for more SEC initiatives to be overturned, leading to increased uncertainty in American policymaking. Investors must prepare for potential changes in the private capital world and become more aware of the risks associated with these investments.
Private equity has become a significant player in the US economy over the past two decades, with 32,000 private equity-backed companies employing 12 million Americans. Despite the high returns offered by private capital investments, there is a growing need for transparency and protection for investors, especially as interest rates are expected to rise in the future. The SEC’s desire for more transparency is understandable, but private capital firms argue that excessive regulation could harm their returns.
Asset owners who have investments in private capital funds now have the opportunity to demand better disclosure or leave these investments altogether in response to the New Orleans ruling. The challenge lies in the long lock-up periods associated with private capital funds and the historical tendency for asset owners to only demand transparency after a crisis. Investors must be proactive in ensuring fair treatment and transparency in the private capital sector to avoid potential shocks in the future.
As the impact of rising interest rates on private capital becomes clearer, investors must take steps to protect their investments and avoid unexpected consequences. By demanding transparency and fair treatment from private capital firms, asset owners can better navigate the risks associated with these investments. Failure to do so could lead to unpleasant surprises for investors in the future, akin to a post-party hangover on Bourbon Street.
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