Interim Report of 

Subcommittee on Private 

Investments

SEC Asset Management Advisory Committee – 7th 

July 2021

1
Agenda

 Asset management and RIC landscape

 Characteristics of private investments

 Private Equity

 Private Debt

 Private Real Estate

 Current regulatory framework for access to private 

investments

 Design Principles

 Discussion

2
Asset 

Management and 

RIC landscape

3
Industry 

Growth

 U.S. asset management industry AUM has grown 

faster than either inflation or GDP, rising from $18 

trillion in 2002 to $45 trillion at the end of 2019

 At the end of May 2021, RICs held $29.8 trillion  Mutual funds: $24.4T  ETFs: $5.1T  Other RICS: $.33T  The number of mutual funds has stayed relatively 

flat over that same period, with around 9,000 funds 

at the end of 2020

 ETFs have grown explosively over the same period, 

from around 200 funds managing $0.3Tn in 2005 to 

around 2,200 funds managing $5.1Tn in 2020

 Mutual funds’ and ETFs’ primary exposure (by 

industry AUM) is to US listed equities at approx. 

40% and 30%, respectively, at the end of 2020

 Retail investors and self-directed retirement assets 

have become an increasingly larger part of the 

overall AUM

DEMAND SIDE

4
Public Market 

Growth

 Total US public equity market capitalization 

matched the asset management industry AUM 

growth, rising from approximately $17 trillion in 

2005 to $50 trillion at the end of March 2021

 Against this, the number of listed public 

companies has reduced dramatically from over 

8,000 in the mid-1990s to around 4,400 currently

 In addition, there has been a growing 

concentration of the largest companies, 

primarily in the tech sector, with the S&P500 

index top 10 companies accounting for around a 

third of the overall value of the index currently

SUPPLY SIDE

5
Conclusions

 We conclude that there is a growing demand for 

investment choice from all investors including 

retail investors as the asset management 

industry grows more quickly than GDP and 

inflation

 Whilst there is arguably greater choice for retail 

investors in terms of tailoring exposure 

particularly via ETFs, exposure is still primarily 

to the underlying US public equity markets

 In turn, this market has grown increasingly 

concentrated with fewer listed companies and a 

higher concentration of large tech companies 

dominating market capitalization weighted 

indices such as the S&P500 and Nasdaq 100

DEMAND SIDE

6
Characteristics of 

Private 

Investments

7
Public vs. 

Private 

Investments

 The cash flows of private investments are unlike those 

public equity 

 Private investments are often made in stages, with 

capital calls occurring over multiple years.

 When distributions occur, these cash flows cannot be re- invested in the original project

 Private investments do not trade in a secondary market, and thus have no market price associated with them. 

Instead, they are usually valued by fund management on a 

quarterly basis

 This makes the calculation of investment returns difficult 

to compare to public market returns

 A range of return measures have evolved that attempt to 

ameliorate these issues, but none are perfect:

 IRR: concerns with cash flow timing, assumes re- investment of returned cash

 Multiple of Money (MoM): ignores duration of investment and timing of cashflows

 Public market equivalent (“PME”) matches private market 

cash flows with investments in the public market index like 

the S&P500: concerns with project scale, index selection

8
Private 

Equity

 There is evidence of private equity (“PE”) fund 

returns being similar to, or better than, returns of 

public funds with some evidence of diversification

 PE managers tend to display a higher dispersion of 

returns compared to public market managers

 Compression in spreads more recently between 

private and public markets potentially driven by 

lower interest rates and lower illiquidity premium 

 High fee product but investors should focus on net 

after fee returns provided there is adequate and 

comparable disclosure to allow them to do so

 We conclude that PE funds have the potential to 

offer return and diversification benefits to retail 

investors. However, the difficulty in measuring 

and reporting returns on a comparable basis, 

coupled with the potentially higher fees 

associated with PE investments, are important 

considerations in the decision of whether to 

expand retail access to pooled PE investments

9
Private Debt

 Using data provided by consultants to 

institutional investors, we reviewed asset level 

and fund level private debt data for periods of 15 

– 30 years in relation to:

 Senior debt

 Subordinated or mezzanine debt

 Opportunistic or distressed debt

 As with PE funds, return comparisons to public 

indices are problematic and require adjustments 

to reflect cash inflows and outflows from the 

private debt funds

 We conclude that private debt funds appear to 

outperform public debt indices over medium 

and longer horizons. Over horizons less than 

three years, private debt funds underperform 

public indices

10
Private Real 

Estate

 Real estate is generally classified into the following 

sub-categories:

 Core

 Core plus 

 Value-add 

 Opportunistic

 Public REITs can invest in all types of real estate 

investments across the risk spectrum. However, in 

order to maintain their REIT tax status under the 

IRS rules, they must distribute substantially all their 

income. As a result, they tend to invest in higher- quality cash flow producing assets within core or 

core plus real estate only 

 Unlike Public REITs, private real estate funds tend 

to invest in value add and opportunistic investment 

opportunities in addition to core and core plus 

properties

 REITs can invest in “illiquid” real estate as liquidity 

for investors is achieved via trading of the REIT 

security

11
Private Real 

Estate

 We compared fund level data provided by 

consultants to institutional investors over 

horizons of up to 10 years to certain public REIT 

benchmarks

 Generally, over a 3, 5 and 10 year period private 

real estate investments outperformed public 

REIT indices. However, this information was 

based on the public REIT indices comparisons 

and comparison methods

 In looking at the one-year return through 

September 30, 2020, there was significant over 

performance from private real estate funds. 

This may be explained by the difference in 

secondary market price-based returns for public 

REITs compared to the underlying asset-based 

valuations for private funds during the 

pandemic

Contd...

12
Current Access to 

Private 

Investments by 

Retail Investors

13
Current Access 

to Private 

Investments by 

Retail Investors

 Open-end mutual funds are subject to a general 

15% threshold on acquiring illiquid investments

 Closed-end funds: 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.

 Interval and tender offer funds are closed-end 

funds subject to the staff position described 

above. They are designed to offer investors 

periodic and limited liquidity options.

 Exempt securities offered by issuers primarily 

under certain small offering exemptions (Reg A) 

and crowdfunding exemptions

14
Conclusions on 

Current Access 

to Private 

Investments by 

Retail Investors

 We conclude that whilst there are some 

methods for retail investors to gain access to 

private investments, these are either in the 

form of:

 diluted exposure in a pool of largely liquid 

assets; or

 higher exposures to private investments via 

interval funds and tender offer funds. We note 

that these have remained a small portion of the 

mutual fund landscape representing less than 

2% of all mutual funds’ AUM 

 As such broad access to private investments is 

currently not available to retail investors via 

existing investment vehicles

15
Legal and Regulatory 

Requirements to 

Access Private 

Investments

16
Legal and 

Regulatory 

Requirements 

to Access 

Private 

Investments

Access to private investments for non-retail 

investors is primarily via “qualification” thresholds. 

The 3 main “qualifications” are:

 Accredited Investor – net worth or income tests, 

or alternatively certain professional certification 

or “knowledgeable employees” 

 Qualified Client- net worth and investor assets 

under management test (or being a 

“knowledgeable employee”)

 Qualified Purchaser-Investments test ($5 

million for natural persons) which is significantly 

higher than the threshold levels in the other two 

requirements and is required to invest in most 

private funds (i.e., private funds that rely on an 

exclusion from the definition of investment 

company under section 3(c)(7) of the Investment 

Company Act)

17
Conclusions on 

legal and 

regulatory 

requirements 

to access 

private 

investments

 We conclude that the current regulatory 

landscape, particularly the financial thresholds 

for Accredited Investors, Qualified Clients and 

Qualified Purchasers, is such that most retail 

investors are precluded from the investing in 

the majority of private investments 

 In particular, the very high financial threshold 

for Qualified Purchasers make access to 

diversified 3(c)(7) private funds virtually 

impossible for most retail investors

18
Overall Conclusions 

19
Overall 

Conclusions

Whilst the returns of private investments we looked 

at are not easily comparable to public markets, we 

find support for the returns being at least slightly to 

somewhat better than comparable public market 

investments

Private investments also offer some diversification 

benefits to retail investment portfolios

We note that private fund managers tend to exhibit 

higher dispersion in their returns compared to public 

fund managers

The current legal and regulatory framework is such 

that whilst there are some retail investment vehicles 

that can invest in private investments, these make up 

a small portion of the AUM in registered investment 

companies

Given the conclusions and observations above, we 

recommend widening retail investor access to 

private investments subject to appropriate Design Principles that strike a balance between wider 

access and investor protection

20
Design Principles

21
Design 

Principles

Any policy recommendations should be consistent 

with design principles that seek to balance investor 

choice, needs, and protection.

 Liquidity

 Direct private investments often involve no 

secondary market liquidity and few if any 

redemption rights

 Investment structures that offer at least limited 

redemption rights or secondary market trading 

ought to be encouraged

 Chaperoned Access

 Retail investors require an additional level of 

protection in accessing private investments which 

may be achieved via chaperoned access

 Chaperoned access could be achieved through 

various methods including using the RIC framework 

(with some modifications) or allowing retail 

investments only in funds with significant large 

institutional investors participation

22
Design 

Principles

 Diversification

 Diversification through a portfolio of 

investments in different private funds (or a 

private fund of funds) can help reduce potential 

performance dispersion and volatility that may 

occur with more concentrated private 

investments

 In addition, retail investors should consider 

private investments in the context of a 

diversified overall portfolio that includes more 

liquid investments

 Mandating or even monitoring overall portfolio 

diversification may not be feasible

 Disclosure

 Access to private investments must include 

standardized disclosure of important 

information particularly with respect to 

performance, risks, and fees

Contd...

23
Discussion

24