House lawmakers have passed several bills on a bipartisan basis in recent weeks aimed at broadening the pool of accredited investors eligible to participate in private markets, but not everyone agrees that it’s a good idea.
Proponents say that sophisticated investors who understand the risks and complexities of private markets investing should be provided with additional avenues to be deemed accredited and invest in the high-performing asset classes. But opponents say the accredited investor designation should be made tougher to achieve in order to protect investors from risky, illiquid investments with insufficient disclosures.
“The foundation of the real economy is in private markets,” said Robert Collins, partner, co-head of private wealth and head of Partners Group Holding AG’s New York office, noting the decline in the number of public companies. “We certainly believe that any effort to provide access to the real economy to a broader set of our citizens is a good thing.”
Partners Group, a Zug, Switzerland-based private equity firm, had $135.4 billion in assets under management as of Dec. 31, according to Pensions & Investments data.
Stephen W. Hall, legal director and securities specialist with the Washington-based non-profit watchdog Better Markets, has a different viewpoint. “Broadening the pool of accredited investors is a mistake and it’s going to expose more investors to dangerous, opaque and illiquid private offerings, and ultimately it’s going to harm investors,” he said.
Currently, individual investors can qualify as accredited only if they meet certain financial criteria, such as a net worth of more than $1 million, annual income over $200,000 individually or $300,000 with a spouse or partner, or professional criteria, such as investment professionals in good standing who hold certain licenses.
But in Washington, there’s been momentum to expand the ways an investor can qualify as accredited. In a 383-18 vote on May 31, the House passed a bill to require the Securities and Exchange Commission to establish an exam for individual investors seeking to attain accredited investor status. The exam would be administered by the Financial Industry Regulatory Authority, or FINRA.
And on June 5, the House passed two bills via voice vote that are similar in scope and would give the SEC discretion in determining what certifications, credentials or knowledge an investor must possess to qualify as accredited.
The bills will likely face tougher terrain in the Senate with Democrats in the chamber less enthusiastic about the subject, sources said.
Asked for comment on the bills, a spokeswoman for the American Investment Council, a private equity trade group, said in an email that AIC supports “responsible programs that enable more Americans to have access to private markets as it will increase their investment opportunities and their ability to save for retirement.”
The bills are unlikely to shake up private markets, but would “help around the edges,” Mr. Collins said, as more firms establish product offerings designed for accredited investors and high-net-worth individuals.
Mr. Collins’ firm in 2009 established the Partners Group Private Equity (Master Fund), an accredited and qualified client fund that offers exposure to private markets with $13.6 billion in assets, according to the most recent SEC filing.
But while there are opportunities in the space, not every firm is cut out for it, Mr. Collins said. “It’s not for every manager,” he said. “If you’re a focused, single-strategy-type manager, you’re not able to build that scalable, diversified portfolio that can provide liquidity. I think there’s a reason that if you look at firms that have brought solutions to the wealth market, they tend to be the larger institutions that have a variety of strategies.”
The retail investment market has grown sizably in recent years and presents opportunities for institutionally focused money managers, sources said.
Of the $68.9 trillion in assets that are professionally managed in the U.S., roughly $34 trillion is retail, according to a December report from Cerulli Associates Inc. Retail client assets grew 17.5% in 2021, Cerulli found.
“Many firms have entered, many more are planning to enter, it’s a large commercial opportunity,” Mr. Collins said. “If you are able to deliver a thoughtful solution you can have a positive impact.”