Let's Widen Investor Access To Private Markets, Says SEC

Tom Burroughes

19 December 2019

More US citizens could invest in private assets, currently a playground for only the wealthiest individuals or large institutions, if regulatory proposals become hard law.

Yesterday the voted to amend the definition of accredited investor, one of the principal tests for who is eligible to participate in US private capital markets.

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” chairman Jay Clayton, said. “Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”

As Family Wealth Report and other media outlets have shown, a rising number of HNW and ultra-HNW individuals, family offices and others are pushing money into sectors such as private credit, private equity, infrastructure and real estate, attracted by the superior yields earned for lower liquidity. The situation is largely driven by a decade or more of ultra-low interest rates, which have squeezed yields in listed equities. Rising capital requirements on banks have also pushed lending into private funds and other channels at the expense of banks.

The SEC said the proposed amendments would “allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications”.

The proposal would also expand the list of entities that may qualify as accredited investors by, among other things, allowing any entity that meets an investments test to qualify, the regulator said.

A concern that regulators around the world have had is that investors’ expectations about liquidity and access to funds may not fit with what private markets involve. Arguably, there is a need for wealth advisors to educate clients about these areas.

A few days ago reports said that the family office of computer industry tycoon Michael Dell had switched significant assets into the private markets space. There are some concerns, however: There is an estimated $2.0 trillion-plus of "dry powder", or committed capital, in private equity alone, raising some concerns that the sector is getting crowded.

There are also some parallels with the rising enthusiasm in the wealth sector for "direct investing" where no fund is involved. That appears to remain very much the preserve of the richest individual investors as well as family offices, endowments, and similar entities.