Private Markets: Governance Issues Rise to the Fore

New research published today by the CFA Institute Research and Policy Center, titled “Private Markets: Governance Issues Rise to the Fore," reveals new CFA Institute global survey data on investment professionals’ views about private markets governance and practices, including: conflicts of interest; asymmetry of information; General Partner/Limited Partner relations; transparency; valuation issues; fees and expenses; and regulation.

The survey data reveal several areas of key concern and show solid majorities supporting regulatory requirements around quarterly statements, annual audits, and an independent fairness or valuation opinion of any adviser-led secondary transactions.

In the United States, which has a dominant share of private market investments, the Securities and Exchange Commission attempted to impose sweeping new rules through its Private Fund Adviser Rules. The Rules, struck down by the U.S. Court of Appeals for the Fifth Circuit recently, included all three of the above requirements.

Stephen Deane, CFA, Senior Director, Capital Markets Policy, CFA Institute, said:

“Private markets can seem like a polarized landscape with often sharply divergent policy views. But our research reveals a missing middle ground among the investment professionals who make up our membership. A majority of members surveyed took a moderate position. While they believe room exists for improvement in private market practices and limited new regulation, they also say that problems are not significant, do not represent a market failure, and do not call for drastic new regulation. Their biggest concerns revolve around valuation, performance measures, and transparency, in particular better disclosure of fees and expenses.” 

Key Survey Findings

• Just over half of respondents (51 percent) believe that while some practices could be improved, problems in private markets are not significant. 24 percent say there are substantial problems or even market failures in private market practices. 17 percent believe private markets function well.

   

• Top three private markets concerns noted:
  • The frequency and accuracy of valuation reporting
  • The frequency, comparability, and accuracy of performance measures
  • The fairness and transparency of fees
    
    

• A plurality (41 percent) believe GPs dominate negotiations with LPs. But 38 percent disagree, saying negotiating power depends on a variety of market factors.
  
  
• A majority (52 percent) support new regulations for private markets, but only limited ones. Respondents prefer required disclosures over regulatory prohibitions.

   

• 70 percent support quarterly statements that include information on private fund’s fees, expenses, and performance (66 percent in favor in the United States)

   

• 79 percent support an annual financial statement audit of the private fund performed by an independent public accountant (70 percent in favor in the United States)

   

• 61 percent support a fairness or valuation opinion of any adviser-led secondary transaction (52 percent in the United States)

   

• GPs and LPs voiced similar views on most questions. They differed most in their views on the disclosure of fees and expenses: 51 percent of GPs found such disclosures adequate, while 58 percent of LPs did not.

The report additionally includes a series of recommendations for investors and policymakers.

To access the report, visit: https://rpc.cfainstitute.org/en/research/surveys/2024/private-markets-governance-issues.