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November 10, 2021 03:39 PM

SEC's Gensler wants to bring more transparency to private equity, hedge fund fees

Brian Croce
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    Gary Gensler
    Evelyn Hockstein/Reuters
    SEC Chairman Gary Gensler.

    SEC Chairman Gary Gensler has asked the agency's staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets.

    While fees for registered investment funds and index funds have come down significantly since he left Wall Street in the 1990s, hedge fund fees are down slightly and private equity fees are about the same, Mr. Gensler said Wednesday during a speech at the Institutional Limited Partners Association Summit.

    The average private equity fees were estimated to be 1.8% (annual management fee) and 20.3% (performance fee) in 2018 and 2019, Mr. Gensler said, adding, "Not that different from when I was on Wall Street." Average hedge fund fees were estimated to be 1.4% (annual management fee) and 16.4% (performance fee) last year, he added.

    Related Article
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    "Together, those fees might add up to 3 to 4% in private equity and 2 to 3% per year in hedge funds," Mr. Gensler said. "Against these $9 trillion in net assets under management, there may be somewhere in the range of $250 billion that are going to fees and expenses each year."

    Mr. Gensler would like to see a reduction in those fees.

    "More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets," Mr. Gensler said. "This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations."

    Separately, Mr. Gensler also said he's asked the staff to consider recommendations on "side letters."

    Unlike in the public markets and mutual funds, private funds can select which investors they're letting in and on what terms, Mr. Gensler said. A limited partner can sometimes get a private fund deal by using a side letter.

    Side letters, while sometimes benign, can other times create preferred liquidity terms or disclosures, which can create an uneven playing field among limited partners based upon those negotiated terms, Mr. Gensler said.

    "Research in this area suggests that similar pension plans consistently pay different private equity fees," he said. "The range of fees can be large. Thus, I have asked staff to consider recommendations regarding how we can level the playing field and strengthen transparency, or whether certain side-letter provisions should not be permitted."

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