The General Solicitation ban for private equity (and other private securities) is no more thanks to the SEC. There has been a lot of talk today about what this means for private equity and we at Bison.co wanted to share our view.
1. Issuers do not need to (and very likely will not) solicit funds. Dan Primack notes an opportunity to get money from accredited investors into funds, but cautions that most top-performing managers will not solicit publicly to avoid scrutiny. There is another dimension to this…
The lack of accredited investors in private equity funds is not only related to a lack of awareness of opportunities (which lifting the ban will rectify), but also relates to funds actively avoiding accredited investors. One reason is that most funds seek exemptions from the Investment Company Act of 1940. The funds rely either on section 3(c)1 (limit of 100 investors in the fund) or section 3(c)7 (only qualified purchaser investors–with >$5 MM in assets). Accredited investors easily bring numbers of investors over the 100 limit of section 3(c)1, while barely contributing to the capital base. Also, very few accredited investors qualify as qualified purchasers. Furthermore, fund managers are restricted from taking carried interest (incentivized based compensation) from accredited investors, which is the primary economic driver for most managers.
Accredited investors play a very limited role capitalizing the industry. The real question raised by the new rules on general solicitation then goes to efficient marketing.
2. Opportunity to publicly discuss and publicize information about funds. Lifting the solicitation ban provides a great opportunity for funds to share more information and, ultimately, help boost fundraising in a tough market (at Bison we track ~2,000 funds in market at this time). This brings about the problem of efficient marketing channels. Remember that >90% of the capital in private equity funds comes from institutional investors (see our earlier post). Solicitation will need to reach these investors. The point is that traditional media channels likely offer limited opportunity to influence the already inundated analyst, principal, or investment manager at the local pension fund, endowment, or asset manager.
3. Resistance. More importantly, LPs put 60%-80% of their capital with existing managers (re-ups) and investments with new managers are largely planned out years ahead of the actual fundraising. General solicitation will have to reach a very small subset of LPs that have not earmarked their investments or bring change to the way LPs think about private equity investments, which may take some time.
4. Taking the Private out of Private Equity. Lifting the general solicitation ban brings new Form D filing requirements (calling for filings before general solicitation begins as well as additional details about private offerings) and enables GPs to share more information with the public. There remains, however, a fundamental data problem in the industry stemming from the disparate sources and unstructured format of data. There is a strong need for actors that can augment all industry data and create a true information platform for private equity. This is what we continue to work on at Bison.co.
Co-Founder of Bison
Co-Founder of Bison