Look back: on gay marriage and private equity

A US Supreme Court ruling on same-sex marriage may expand the pool of accredited investors able to make private equity commitments. 

(Editor’s note: an unedited version of this article originally appeared on privatefundsmanagement.net in June 2013. On Friday, the Supreme Court ruled that states cannot ban same-sex marriage, potentially expanding the pool of investors permitted to invest in alternatives.) 

A landmark ruling on gay marriage could potentially change the legal landscape for millions of Americans.

That’s true any time the Supreme Court must wrestle with sensitive issues that touch upon equality, gender and religion – matters that are generally outside the scope of pfm’s mandate.

But a case this monumental will produce ripple effects throughout the US legal system, one of which may impact fundraising for the alternatives market.   

Only “accredited persons” can invest in private equity, according to the US Securities and Exchange Commission (SEC). In SEC terms, that means the person must – either on their own, or together with a spouse – be worth more than $1 million (not including their house). Or the person must make an annual salary of at least $200,000, or have a $300,000+ combined annual income with their spouse.

The word spouse is important. Under the Defense of Marriage Act (DOMA) enacted in 1996, regulators must interpret the definition of “spouse” as the legal union between one man and one woman. If the Supreme Court overturns DOMA (as it did on Friday), regulators would presumably need to revise that interpretation – potentially causing an uptick in the number of high-net-worth married couples able to invest in private equity.

It’s hard to come up with solid estimates as to how much capital might be eligible to make fund commitments that wasn’t before. But given nearly one-third of high-net-worths polled recently by financial services group Northern Trust said they were more inclined to consider alternative investments now than they were five years ago, having more such individuals considered accredited would surely be good news for fund managers.

Private equity fundraising is of course not the main point, but a footnote to the Supreme Court decision. But it is some interesting food for thought for GPs wishing to expand their investor base.