Private Investment SubCommittee Update

SEC Asset Management Advisory Committee - 16th

September 2020
Agenda

 Recap on why we are focused on potential expansion 

of access to private investments – Supply and 

Demand Dynamics in US Asset Management

 Update on two main workstreams

 Analysis of whether private investments provide better and / or 

diversifying returns

 Current regulatory landscape

 Next stage: Design Principles

 Today’s panel

 Some terms defined

2
Supply and Demand 

Dynamics in US Asset 

Management - Recap

3
 The pool of investment assets continues to grow due 

to demographics and macro economic factors

 Retirement savings represent more than half of the 

AUM of asset management

 IRAs and self directed defined contribution plans (e.g. 

401(k)) continue to increase in size and relative share 

of retirement assets

 Defined benefit plans active participants are reducing 

sharply and many of the plans are transitioning to the 

payout phase of their life cycle

Demand for 

Asset 

Management 

4
0

50

100

150

200

% 

250

0

5

10

15

20

25

30

35

40

45

50

2002 2010 2019E

As a Share of GDP

Total Assets

U.S. Money Management Industry Assets 

Total and as a Share of GDP

2002 Through 2019E

Total Assets As a Share of GDP

$ Trillion

The U.S. Industry is Around $45 Trillion in Size

Source: Michael Goldstein, Presentation to AMAC January 2020 - https://www.sec.gov/files/Empirical-Research-Issues-Facing-US-MM.pdf

5
Retirement Assets make up an increasing share

6

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2019

The U.S. Money Management Industry

Composition of Assets Under Management

2000 Through 2019 

IRA Accounts Defined-Benefit Pension Plans

Defined-Contribution Plans2 Retail Mutual Funds/ETFs and Others3

Retail Separate Accounts, Trusts and Alternatives Other Institutional Categories1

Source: FMMI Analysis.

1 Endowments, foundations and outsourced insurance assets.

2 Includes 401(k), 403(B), 457 and union defined-contribution plans.

3 Includes variable annuities and college savings plans.

4 Includes hedge funds and private equity funds.

4

Retirement

Assets
Self directed Defined Contribution plans growth

Source: Investment Company Institute. 2020. 2020 Investment Company Fact Book: A Review of Trends and Activities in the Investment Company 

Industry. Washington, DC: Investment Company Institute. Available at www.icifactbook.org.

IRAs + 401(K) plans have 

grown from $2.2tn to 

$17.2tn since 1995 and from 

33% to over 53% of total 

retirement assets .

In the same period DB plans 

grew from $3.4tn to $10.1tn 

but as a percentage of total 

retirement assets decreased 

from 49% to 31% of total 

retirement assets.

7
Supply Side 

for Asset 

Management

 The public equity market, whilst larger is more 

concentrated and with fewer listed companies

 Companies are staying private for longer and 

getting larger while private

 Private fundraising easily surpasses public 

fundraising

8
9

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

LISTED U.S. COMPANIES & MARKET CAPITALIZATION

Listed Companies

Market Cap Bn

Source: The World Bank https://data.worldbank.org/indicator/CM.MKT.LDOM.NO

Growing Concentration of US Listed Companies 
Start-Ups Have Stayed Private Longer

Source: https://site.warrington.ufl.edu/ritter/files/IPOs2019VC-backed.pdf 10

0

2

4

6

8

10

12

14

16

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Median Age in Years

Year of IPO

Median Age of U.S. Companies Doing an IPO, 1980-2019

Median Age
0%

5%

10%

15%

20%

25%

30%

35%

19951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020

S&P Top 5& 10 companies 1995 - 2020

Top 5 Top 10

 - 500.00 1,000.00

 1,500.00

 2,000.00

 2,500.00

General...

AT&T...

Exxon...

Coca-...

Merck &...

Altria...

Procter...

Johnson...

Microso...

Walmar...

General...

Exxon...

Microso...

Citigrou...

Walmar...

Pfizer Inc

Bank of...

Johnson...

America...

Internati...

Apple Inc

Exxon...

Alphabe...

Walmar...

Microso...

Berkshir...

General...

Internati...

Chevron...

Johnson...

Apple Inc

Amazon...

Microso...

Alphabe...

Faceboo...

Berkshir...

Visa Inc

Johnson...

Walmar...

Masterc...

1995 2004 2012 2020

In Billions

MARKET CAP 

Source: Bloomberg + GTS analysis. Market Cap measured 12/31 other than 2020 when it was measured 8/31 11

Growing concentration of Top 5 and 10 Companies in S&P 500
Source: Committee on Capital Markets Regulation - Expanding Opportunities for Investors and Retirees: Private Equity at Pg 5

Equity raised via U.S. IPOs is derived from Dealogic. Equity raised via private offerings is derived from Regulation D filings available on the SEC’s EDGAR 

database and excludes pooled investment vehicles and real estate investment trusts.

12

Private Reg D offerings are a larger proportion of equity raising
Source: https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf Pg 8

Registered equity includes initial and follow on public offerings and all numbers include corporate and non-corporate issuers

13

SEC data shows a similar trend across a wider universe
Regulatory 

Landscape

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Summary

 The Securities Act provides for various 

exemptions from registration for issuers of 

securities, but Reg D offerings to Accredited 

Investors are the most widely used

 Any investment in a private fund will likely also 

require consideration of the Investment 

Company Act – for example, the Qualified 

Purchaser definition is a much higher threshold 

relative to the Accredited Investor

 With 401(k) investors additional ERISA 

requirements also need to be considered

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 Securities Act 1933 - a company that offers or sells its securities must 

register such securities with the SEC unless an exemption from 

registration is available

 Section 4(a)(2) - exempts from registration transactions not involving a 

public offering – SEC v Ralston Purina Co –US Supreme Court decision –

“sophisticated investors”

 Various other safe harbors. Exempt offerings are more than 2x larger 

than registered offerings*. Summary of exemptions can be found in links 

at the end of the presentation

 Rule 506(b) of Reg D is by far the largest exempt offering used by private 

funds

 Accredited Investors and up to 35 non-accredited investors

 No general solicitation

 Accredited Investor definition

 Income/net worth financial requirements for natural persons (income in excess of $200k (or 

$300k joint income with spouse) in each of the last 2 years or a net worth in excess of $1m 

(excluding value of primary residence). Also includes other categories with different 

thresholds.

 Recently extended to specified people based on professional certifications, designations or 

credentials

Regulatory Landscape

16

*2019 –SEC Proposed Rule - Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets Pg 8-9
 Investment Company Act of 1940 - Section 3(c) exempts from the 

definition of investment company many types of entities, including most 

PE funds, that would otherwise be subject to the significant regulatory 

requirements of the Act. Most PE funds use one of two exemptions

 Section 3(c)(1) – non-public offering and fewer than 100 investors

 Section 3(c)(7) – non-public offering and investors limited Qualified Purchasers. Qualified 

Purchaser requirements are primarily financial and much higher than Accredited Investor 

requirements, generally more than $5m in investments for individuals

 Most common types of registered investment companies (“RICs”):

 Open end – eg: mutual funds

 Closed end – eg: Interval funds

 ETFs – open end or UITs

 Main requirements / restrictions of RICs

 Investment advisory contract and corporate governance requirements

 Limitations on affiliated transactions, use of leverage, among others

Regulatory Landscape

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 Standards affecting RIC’s private investments:

 Open-end funds are subject to a general 15% threshold on acquiring illiquid investments

 Staff in the SEC’s Division of Investment Management has historically raised investor 

protection concerns if closed-end funds that invest more than 15% of their assets in private 

funds were to be offered to retail investors. As a result, these closed-end funds have limited 

their offerings to Accredited Investors, although Division staff has indicated that they are 

re-examining this staff position*

 Investment Advisers Act of 1940 has a separate requirement 

prohibiting an investment adviser from charging a performance fee 

unless the client is a Qualified Client:

 $1m under the management of the investment adviser; or

 Reasonable belief client had a net worth of more than $2.1m, excluding the value of the 

client’s primary residence (solely or jointly)

 Generally 401(k) plans, like all employer sponsored plans are 

administered by a fiduciary, are also subject to ERISA rules (sections 403 

and 404 primarily) – including to prudently select and monitor any 

designated investment alternatives under the plan

Regulatory Landscape

18

Source: Dalia Blass, Director of the Division of Investment Management, Speech: PLI Investment Management Institute (July 28, 2020)
 DOL recently issued an information letter setting out a framework with 

multiple issues that plan fiduciaries must consider in addition to the 

appropriate level of liquidity

 It is estimated around 13% of households meet the Accredited Investor 

definition and around 2% or even less meet the Qualified Purchaser 

threshold*

 The average Fidelity 401(k) balance was around $112k at the end of 2019 

with around 233k accounts out of 17.3m (1.35%) having balances in 

excess of $1m^. 

Regulatory Landscape

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* Committee on Capital Markets Regulation - Expanding Opportunities for Investors and Retirees: Private Equity – Pg 2 and footnote 107 comparing IRS data with SCF data

^ https://s2.q4cdn.com/997146844/files/doc_news/archive/quarterly-retirement-trends-021320.pdf , https://www.benefitspro.com/2020/02/13/record-number-of-millionaires-infidelity-401k-plansiras/?slreturn=20200814102918#:~:text=Fidelity%E2%80%99s%20401%20%28k%29%20data%20comes%20from%2023%2C000%20plans,years%20had%20an%20average%

20account%20balance%20of%20%24421%2C700.
Design Principles 

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Summary

 Do not want to pre-empt conclusions from the 

analysis of private investment returns

 Guiding principles will be useful in helping us 

come up with potential recommendations

 A working group within the PI sub-committee 

will focus on this – led by Joe Savage

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 Should access only be via a diversified pool (fund of funds)?

 Should access be via an intermediary and should they act in a fiduciary 

capacity?

 What disclosure should investors be provided?

 Should there be restrictions on underlying investments?

 Asset class

 Only other PE funds

 Minimum size requirements

 Minimum % held by “qualified” or “large” investors

 Should there be differentiated access

 Retail v “super” retail

 Should there be an incentive for funds that can show true market pricing 

and secondary trading

 Who are “main street” or “retail investors”

 Individuals

 IRAS

 401(k)s

Design Principles

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Panel Discussion –

Key Terms

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 IRR solves for the discount rate that makes the net present value 

(“NPV”) of cashflows equal zero

 Favors early cashflows and is sensitive to timing

 Assumes reinvestment rate that might not be achievable

 Consider 3 alternative investments with equivalent NPV, similar multiple 

of invested capital but substantially different IRRs due to the timing of 

cashflows

Internal Rate of Return (“IRR”)

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Year 0 1 2 3 4 5 IRR MOIC NPV 8%

Investment 1 -10.00 5.00 5.00 5.00 5.00 5.00 41% 2.50 9.23

Investment 2 -10.00 0.00 0.00 0.00 14.10 14.10 26% 2.82 9.23

Investment 3 -10.00 11.19 11.19 0.00 0.00 0.00 76% 2.24 9.23
 PME compares the returns of a private investment to a public market 

benchmark

 There are several variants

 Long-Nickels PME

 PME+

 KS-PME

 Direct Alpha

 mPME (Cambridge Associates)

 L-N compares a fund’s IRR with a theoretical benchmark’s IRR which 

mirror the cashflows of the fund with the index NAV at the end of a 

period being the future value of the index investment less cashflows. 

PME+ addresses a shortfall of L-N PME which can result in a negative 

index NAV if there are substantial early cashflows in the private 

investment comparison by applying a constant scaling factor to ensure 

the index FV is equal to the private investment FV

 K-S PME compounds a private investment cashflow (both capital calls 

and distributions) based on a public market index performance. The 

fund’s actual NAV + compounded distributions is then divided by the 

compounded capital calls to produce a simple ratio. A ratio greater than 

1 indicates the private investment outperforms the public index

Public Market Equivalent (“PME”)

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Public Market Equivalent (“PME”)

 Direct Alpha quantifies out/underperformance by calculating the IRR of 

the compounded cash flows plus fund NAV, rather than a multiple of 

performance

 mPME is analogous to PME+ in that it uses a scaling factor but the 

scaling factor is dynamic rather than static

 We have provided some links at the end for further reading

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Year Capital call Cashflow +NAV Index value Future value L-N PME NAV

0 -25 100 -33 (A)

1 15 115 17 (B)

2 20 130 20 (C) 16 -[(A)+(B)]

K-S PME = FV Cashflow + NAV / FV Capital call = [(B)+(C)] / (A) = 1.14

IRR (using actual cashflows and NAV) 24%

L-N PME 14%

Direct Alpha (using FV cashflows) 9%
Questions and 

Comments

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References 

and Materials

 Michael Goldstein, FMMI - Issues Facing the US Money Management Industry -

Presentation to the SEC Asset Management Advisory Committee January 2020

 Investment Company Institute Factbook 2020

 Other ICI research

 SEC Summary of Exempt Offerings

 Committee on Capital Markets Regulation - Expanding Opportunities for Investors and 

Retirees: Private Equity

 SEC Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities 

Offerings, 2009-2017- DERA White Paper

 SEC Proposed Rule, Facilitating Capital Formation and Expanding Investment 

Opportunities by Improving Access to Capital in Private Market (March 2020)

 SEC - Final Rule: Amending the Accredited Investor Definition

 Accredited Investor statutory definition

 Qualified Purchaser statutory definition at para 51

 Dalia Blass, Director of the Division of Investment Management, Speech: PLI Investment 

Management Institute (July 28, 2020) 

 SEC Final Rule on Investment Advisers charging Incentive Fees

 US Department of Labor - Information Letter 06-03-2020: Use of Private Equity 

investments in 401(k) plans

 Insead: Measuring Private Equity Fund Performance

 An ABC of PME: Landmark Private Equity Brief- March 2014

 Evaluating Private Equity Performance: PME v Direct Alpha

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