New rules and amendments updating the Investment Advisers Act of 1940 and adopted by the Securities and Exchange Commission (SEC) in November 2023 are going into effect for all private funds, with compliance dates determined by rule and fund adviser size. According to the SEC, the final rules were put in place to further protect private fund investors by increasing transparency, competition, and efficiency in the private funds market. The rules amplify the role of valuation services in compliance, providing investors key information about fund performance to further support decision-making.
Compliance with the new SEC rules
Among several mandates, the final SEC rules require private fund advisers registered with the SEC to provide investors quarterly statements with information about fund expenses and performance. The final rules also prohibit private fund advisers from providing investors preferential treatment with respect to redemptions and information if such treatment would have a material, negative effect on other investors. There are a number of other updates private equity groups should be aware of, which we’ve summarized below.
While the private fund adviser reforms do add compliance steps for private equity funds, they also help investment firms better meet their limited partners’ (LPs) need for timely, accurate information. The reforms come at a time when the private equity space has been seeing higher interest rates, lower multiples, and greater use of continuation fund and secondary transactions, and investors increasingly have been asking fund advisers for more clarity and data.
Third-party valuation services and The Adviser-led Secondaries Rule
In alignment with the new SEC rules, specifically The Adviser-Led Secondaries Rule, private equity groups must obtain a fairness or valuation opinion when conducting an adviser-led secondary or continuation fund transaction, with the fairness opinion (or valuation opinion) issued by an independent third-party valuation services provider. The opinion must be distributed to investors who have the option to sell their interests in the private fund or to exchange them for new interests in another vehicle led by the same adviser.
Establishing valuations as best practice for the SEC Quarterly Statement Rule
The new SEC Quarterly Statement Rule mandates private equity firms provide their LPs with quarterly statements that include details about fund costs and performance as well as compensation and other amounts paid to the adviser. Although valuation opinions aren’t required by the SEC for funds’ quarterly statements, these opinions can offer investors a clear, accurate, reliable assessment that supports informed decision-making. With investors’ increasing sophistication and growing demands for more and better information, funds that offer third-party valuation opinions to their LPs could have a competitive advantage over funds that value assets themselves.
Recap: Private equity valuation services are critical
With the SEC private fund adviser reforms, valuation services become even more critical to investment firms as well as their investors. Objective valuation and fairness opinions from independent third-party valuation services providers help private equity advisers offer their LPs the information they’re seeking, strengthening transparency, trust, and confidence in adviser and fund performance alongside regulatory compliance.
