Click the top right of the presentation to view full screen
Close to half of the 114 CFOs canvassed for the Private Funds CFO Insights Survey 2024, conducted in partnership with Aztec Group, work for advisers of registered funds. Of that figure, 15 percent have been examined by the US Securities and Exchange Commission since the introduction of the regulator’s new marketing rule in November 2022.
Those respondents said that the most significant area of focus pertaining to the new rule during their exams was on performance-related metrics, predecessor fund performance and hypothetical performance.
While any new bout of regulation will typically add to a CFO’s load, there is a general understanding that enhanced disclosure rules are inevitable, particularly as the industry gears up for democratization. “Private equity firms don’t like it when new rules come out,” says Jason Snider, chief financial officer at Gauge Capital. “There is always some grumbling. But I can fully understand why the SEC is making changes. The asset class is opening up to a broader group of investors and it is the regulator’s job to ensure there is transparency.
“We have implemented the changes and put processes in place to ensure that we have eyes on everything that is going out the door to an investor,” Snider adds. “Like any new regulation, there will be an impact on costs and people in order to adhere to the rules.”
However, it is clear that CFOs still require more guidance from the SEC when it comes to implementation, particularly with regards to the appropriate methodology for calculating a hitherto unexplored metric – net performance.
Whether firms are relying on the delta between net and gross performance to calculate a net number, relying on their highest projected fee amounts, or using a more complex calculation involving deal-by-deal IRRs and pro rata expense allocations, the challenge CFOs now face is how to produce a number that they are comfortable sharing with their investors – and one that is also acceptable to the SEC.
“Something we have had some discussion on is the reporting of gross to net returns,” Snider explains. “There are various interpretations of that rule and we have spent a lot of time and other resources trying to understand how we should be calculating that metric. When these regulations come out, it often starts as a guessing game. You have to rely on the advice of experts, but then every expert seems to have a different take. I have nothing against the rules themselves but I would like to see more clarity.”
Snider suggests that the Institutional Limited Partners Association or another group endorsed by the SEC could produce an official interpretation, with clear guidance on how private equity firms should implement the changes. “The only feedback I have is that these rules don’t come with instructions.”
“I have nothing against the rules themselves but I would like to see more clarity”
Kristen Laguerre, CFO and chief operating officer at MPM BioImpact, agrees that CFOs are still in the learning phases when it comes to understanding the full implications of the marketing rule.
But she adds that the impact has already been significant. “We have two affiliate entities and we had to change the way we report, separating track records when, to our mind, the affiliates are two parts of a whole, pursuing the same strategy, albeit at slightly different stages or with slightly different therapeutic focuses. That was tough for us to stomach because it doesn’t reflect how we do business.”
MPM has a two-person inhouse compliance team, but the firm also uses consultants. “Right now, their job is almost entirely focused on understanding how this rule is going to play out,” Laguerre says. “It has certainly changed how we market and specifically how we report on performance data, although we are still able to communicate our story effectively. At the end of the day, therefore, it isn’t that the rules are harming us. They are just making our lives much more difficult.”
Meanwhile, a third CFO, describes the rules as “largely a pain in the neck.”
“Net performance by portfolio, in particular, is nonsensical although we have it up and running,” they add. “We have had to change our presentations. So, it has been a nuisance. But that is the extent of the negative impact. It is just another hoop to be jumped through.”