What The DOL Decision On Private Equity Means For Financial Advisors

Private equity will soon be a part of millions of investment portfolios and financial advisors need to be properly prepared to help their clients navigate these assets.

Over the last year, there have been notable changes to the sentiment and regulation surrounding the private market and access for its participants. These changes have the potential to usher in a broader investor base and channel additional capital into this market, resulting in greater efficiency that is much needed in private markets.

On June 3rd, 2020 the US Department of Labor (DOL) released an information letter regarding private equity investments. This letter opened the doors to including private equity funds within defined contribution retirement saving plans. A few weeks after the information letter was released, Dalia Blass, Director, SEC Division of Investment Management spoke about enhancing access to private markets as one of the important initiatives for the Commission. Finally, last year the SEC approved several enhancements to the regulatory regime governing private investments, to expand investor access and participation in an important slice of the capital markets pie.

The DOL information letter aims to address this disparity. It should also be noted that the DOL letter sets out some strict guidelines as to how private equity funds can be included in defined contribution investment accounts. The information letter presents a well balanced and appropriate step to eliminate the differences in investment choices available to defined benefit and defined contribution plans.

Given the amount of investable assets available from defined contribution accounts, it is likely that private equity fund managers will make a concerted effort to access this new source of investor capital. These funds are currently facing an increasing volume of potential investment opportunities in real estate, infrastructure, technology, and other sectors of the global economy. Access to a deeper pool of capital will enable managers to consider the broader range of investments evolving in private markets.

Private markets provide diversification through uncorrelated assets. These assets also offer investors the chance to invest in interesting and impactful opportunities that are not readily available in public markets. Whether it’s Aerospace, Cybersecurity, Blockchain, or other emerging technologies, private markets provide access to a wider variety of investments. Further, it is likely that regulators will continue their efforts to expand access into private markets for investors while enhancing regulatory oversight to improve investor protections.

Financial advisors should take the time to learn more about this asset class so that they can best advise their clients while providing holistic investment and life-planning guidance. Advisors need to understand how private equity and private markets operate, how to manage their client’s exposure to private markets, and the costs associated with these types of investments in order to evolve. 

A key part of achieving that level of proficiency is to begin to incorporate private equity and private market data into existing portfolio analytics and management toolkits. This will allow advisors to begin measuring client exposure, diversification, and risks associated with private investments. Pretty soon, it will be difficult to avoid private market investments, especially if advisors seek an increased share of clients’ wallets.

As investors increase their exposure to private equity and private market investments, there is likely to be an increase in interest from individual investors beyond their 401(k) plans. Private investments will remain available only to accredited investors, but accredited investors represent a growing population that controls significant wealth. 

The largest financial services firms in the US are also addressing this growing segment and are turning to private markets as an opportunity for growing their assets under management in the coming years. Currently, there are 22 million people in the US that have accumulated between $1 and $10 million in assets, and asset management firms are looking to capitalize on this growth. Advisors should be paying attention to this move, and consider doing the same thing.

When markets evolve, financial advisors have to adapt. Whether it was adopting mutual funds, separately managed accounts, or ETFs, investment innovation has always kept advisors on their toes. An efficient and manageable private securities market is now possible, and financial advisors must learn about private equity investments and private market infrastructure in order to offer them as a part of their investor toolkit. Advisors who choose to ignore this emerging trend risk missing out on the assets under advisory growth opportunities and the ability to provide holistic investment advice to their clients.

There will be limited transferability of security ownership interests and lack of a trading market. Prospective investors in private securities must be aware of the potential long-term nature of their investment and be able to bear the economic risks of their investment for an indefinite period of time. No material trading market currently exists for any securities on the platform. Ownership interests of private securities on the platform have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state. The right of any prospective investor to sell or otherwise dispose of any of such securities is restricted by federal securities regulation and possibly by the specific terms of an issuer. Any transfers are also subject to compliance with the Securities Act of 1933, as amended, as well as state securities laws and the regulations promulgated pursuant thereto.

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CAIA Connects With iownit To Discuss Private Markets

After Rashad had his first piece published on CAIA’s blog, AllAboutAlpha, we had some broader discussions with Bill Kelly and Aaron Filbeck about the implications of the DOL decision regarding private equity investments, and the SEC’s discussion regarding the definition of an accredited investor.

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