A group of Senate Democrats pressing for new laws requiring more transparency and performance reporting for the private equity industry cited the rapid growth of private credit in a letter to the Securities and Exchange Commission.
In a May 15 letter to SEC Chair Gary Gensler, the group said “private credit funds have become direct competitors to banks, but are not subject to the same oversight and supervision,” while noting the increasing participation of retail investors in the private credit markets.
The signatories called for the approval and implementation of the SEC's Private Funds Proposal.
Last year, private debt accounted for roughly one-third of financing for private equity transactions, the letter noted.
Against the background of this growth, there have been troubling trends, the group said in the letter. Private credit had $1.4 trillion of assets under management globally at year-end 2022, more than double the level of 2017, the letter stated.
The lawmakers also cited greater marketing efforts aimed at individual investors.
“The largest direct loans on record have been under consideration by groups of private fund managers and one of the biggest private credit investors has just launched a $1.5 billion fund that will be marketed primarily to high-net worth individuals,” the letter said, referring to a Bloomberg report from late April that said Ares Management is raising such a fund.
The signatories called for enhancements to the Private Funds Proposal based on trends of recent months that would require more reporting and performance disclosure. One reason for this is that private fund advisers’ fees are based on fund sizes, facilitating potential overcharging of investors, the group said in the letter.
“Troublingly, there is limited data on fund size and fund activities, and almost no data on the fees assessed by those funds. Investors need increased transparency, more informative and useful data, and prohibitions on abusive and conflicted practices,” the letter reads. “In turn, that will help them hold private fund managers accountable for violations of their fiduciary duties. That will also help limit fraud enabled by the opacity and weak rulebook that characterize our private markets.”
Under current rules, “fund results often lack sufficient detail for investors to fully understand fund valuation practices and the performance of individual investments or to compare returns among private market investments,” the group said in the letter.
The proposal would require private fund advisors to obtain annual audits of private funds and publish quarterly performance data. Other proposed changes include reporting of any events that signify stress or that could harm investors, and would prohibit “inequitable treatment among fund investors, including opaque arrangements that afford preferential treatment to certain investors,” the letter said.