Private equity wary of SEC moves

The private equity community is watching warily as the Securities and Exchange Commission contemplates if and how to regulate hedge funds.

According to the SEC, private equity and hedge funds fall under the same category of “private funds” which grants them certain regulatory exemptions. Among the more prominent exemptions, private funds are free from having to redeem investors’ money for the first two years of an investment. This two-year “lock-up period” enables fund managers to invest in illiquid assets – hard tangible assets like privately held companies – for an extended period.

The SEC recently confirmed that it will maintain this exemption for the foreseeable future, an announcement hailed by the private equity community.

But other regulatory discussions worry private fund managers. In particular, the SEC is contemplating a rule that would limit private funds to only 15 clients. After reaching this threshold, funds would have to “register” with the SEC, which would impose greater compliance and regulatory burdens on private funds.

The increasing popularity of hedge funds is driving these regulatory moves. Private equity fund managers worry that if enacted, these heightened regulations will eventually apply to their operations as well, hindering their ability to increase the size of their funds and investments.