Alt Investments

Regulators Must Craft New Rules For Growing Private Markets

Tom Burroughes Group Editor 11 July 2022

Regulators Must Craft New Rules For Growing Private Markets

Platforms and membership
YieldStreet is a platform that enables investors to build portfolios in areas such as private markets. It has about 400,000 members and, so far, about $3.5 billion has been invested in this asset class area via the platform. 

Weisz notes that the private market space is still relatively new. The industry must embrace its educational role through shorter, snappier and more succinct copy that avoids jargon. Yieldstreet has a blog, education resources and related content to help. 

The stakes are high. With as much as $70 trillion of wealth due to be transferred to younger generations, there are around 15 million US accredited Investors and about a further 30 million earning $100,000 or more a year – a big market for these areas. The same pressures and dynamics, to varying degrees, operate in Europe and the UK. (The UK's Financial Conduct Authority has brought out plans for a "Long Term Asset Fund", designed to "invest efficiently in long-term, illiquid assets". The UK watchdog is trying to craft a regime through which affluent investors can enter the space, with certain safeguards. The move is likely to be emulated by regulators other major jurisdictions.

Regulatory concerns
Back to the subject of regulation, a concern that watchdogs around the world have had is that private market investing is typically less liquid than holding a fund of stocks or bonds. With open-ended funds, for example, there can be a mismatch between the liquidity expectations of clients and the underlying assets. (In Europe, this can be problematic with real estate funds, as seen with temporary closures of UK property funds that were hit in the summer of 2016 after the Brexit referendum.) Regulators want to avoid nightmare headlines of retail clients trapped in funds which they cannot get out of.

However, scale will help with the liquidity question as more people enter the space, Weisz said. “The community of people investing in private markets should be large enough to be able to support the creation of secondary markets…this doesn’t need to be daily liquidity.”

Under the chairmanship of Gary Gensler, the SEC is considering imposing some of the reporting/disclosure requirements on private equity and hedge funds that apply to listed companies. That might dampen some of the attractions, at least on the margins. The regulator is mulling rules to require more private companies to disclose information related to their finances and operations. Companies that are privately held often circumnavigate current reporting rules, which are based on the number of investors. Gensler and the SEC reportedly want to close those loopholes. In January 2022 the SEC proposed a series of rule changes that call for more information disclosures, faster, from a larger pool of private equity and hedge funds. For both classes of investors, the rules would require next-day disclosures of significant events.

Whatever certain bumps in the road there are, YieldStreet’s Weisz is convinced that widening access ought to be a priority, and his firm is determined to be a part of that process. 

In a high inflation environment, with all the issues around volatility, rising rates and fears of recession, Russia/Ukraine/supply-chain disruptions and shortages…”inaction is more tempting than taking action. We really have to think about where we should be comfortable investing,” he said. 

Weisz likes areas such as single-family rentals and multi-family rentals. “The best hedge against inflation has always been real estate. Owning the actual asset has always been a good inflation hedge.”

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