On gay marriage and private equity

A landmark ruling on gay marriage is expected in the US this week, potentially changing the legal landscape for millions of Americans. Whatever the outcome, the impact will be huge.

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 PE Manager’s mandate.
 
But a case this monumental will produce ripple effects throughout the US legal system, one of which may impact private equity fundraising.    
 
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, Doug Cornelius, chief compliance officer at real estate group Beacon Capital Partners, wrote in a blog posting last week that got picked up by the Wall Street Journal. 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, 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 whatever decision the Supreme Court reaches this week. But it is some interesting food for thought for GPs wishing to expand their investor base.