Insights

The Securities and Exchange Commission (SEC) has adopted new rules and amendments (“Private Fund Adviser Rules” or “Rules”) under the Investment Advisers Act of 1940 (“Advisers Act”), affecting private funds and their advisers. The Rules aim to improve transparency and comparability, whilst also restricting or prohibiting certain activities deemed detrimental to investors and the public interest. The Rules will require many advisers to reevaluate their practices and significantly modify or enhance their operational procedures and disclosures, as well as address practices allowing preferential treatment that are deemed contrary to investors’ interests. The Rules impose additional responsibilities and limitations, thereby increasing the administrative burden and costs for both registered and exempt private fund advisers.  The Rules are categorized as follows:

1. Quarterly Statement Rule
2. Private Fund Audit Rule
3. Adviser-Led Secondaries Rule
4. Restricted Activities Rule
5. Preferential Treatment Rule
6. The Compliance Rule

The Quarterly Statement Rule, the Private Fund Audit Rule, and the Adviser-Led Secondaries Rule are applicable to Registered Private Fund Advisers.  The Restricted Activities Rule and the Preferential Treatment Rule are applicable to all Private Fund Advisers.  The Compliance Rule Amendments are applicable to all Registered Advisers. Additionally, the Rules introduced amendments to the recordkeeping requirements for Registered Private Fund Advisers in respect of the above.

The Rules will be effective 60 days after their publication in the Federal Register. There is a 12-month transition phase for advisers with private fund assets under management (“AUM”) of $1.5 billion or more and 18 months for advisers with private fund AUM below $1.5 billion, which does not apply to the Quarterly Statement Rule and the Private Fund Audit Rule as they will have an 18-month transition period irrespective of their AUM.

The Rules represent a pivotal shift in the private fund industry. To adapt to these changes and build investor confidence, it is crucial for private fund advisers to proactively address compliance. It is advisable to engage experts, including accountants, legal professionals, and third-party administrators, and monitor updates to facilitate the adoption of these new Rules.

If you have questions, contact your Gen II Client Service Manager or gen2reg@gen2fund.com.

Below is a summary of the new Private Fund Adviser Rules and recommended courses of action. For full details, see the SEC’s Fact Sheet, Final Rule, and Press Release.

The SEC’s New Private Fund Adviser Rule Amendments

Quarterly Statement Rule

• Applicable to RIAs Only
• 18-Month Transition Period

Rule:

Quarterly statements are to be distributed to private fund investors containing detailed information on:

• Fund fees and expenses;
• Compensation paid to the RIA and its affiliates by the fund and the portfolio investments, and any related fee offsets; and
• Standardized fund performance information (including year-to-date, annual, and since-inception returns up to ten years for liquid funds i.e., funds permitting investor redemptions. Illiquid funds to report performance with and without the impact of fund-level subscription facilities).

Statements must be delivered within 45 days (Q1-Q3) or 90 days (Q4) of quarter-end. For fund-of-funds, the deadlines are 75 days and 120 days, respectively.

Recommendation:

Perform a gap analysis with respect to the performance calculation and disclosure requirements of the Rules.

Private Fund Audit Rule

• Applicable to RIAs Only
• 18-Month Transition Period

Rule:

Each fund must be subject to an annual financial statement audit in compliance with the audit exception in Rule 206(4)-2 of the Advisers Act.  Audited financial statements must be provided to investors within 120 days of the fund’s year-end (180 days for fund-of-funds).  These financial statements must be prepared under US GAAP and audited by a PCAOB-registered and -inspected firm.

Recommendation:

Coordinate with your auditors and Gen II to ensure that the Rule requirements are met. If your fund was not previously audited, the initial audit will require greater effort since the auditor will need to gain comfort on the beginning-of-the-year balances.

Adviser-led Secondaries Rule

• Applicable to RIAs Only
• 12-Month Transition Period for Large Advisers (> =$1.5B AUM)
• 18-Month Transition Period for Small Advisers (< $1.5B AUM)

Rule:

Funds undertaking an adviser-led secondaries transaction are required to (i) obtain a fairness opinion or a valuation opinion and (ii) disclose any material business relationships between the adviser and the opinion provider during the previous two years.

Recommendation:

Prior to undertaking a secondaries transaction, identify a third-party service provider meeting the Rule requirements to provide the fairness or valuation opinion.

Restricted Activities Rule

• Applicable to All Private Fund Advisers
• 12-Month Transition Period for Large Advisers (> =$1.5B AUM)
• 18-Month Transition Period for Small Advisers (< 1.5B AUM)

Rule:

Restricts private fund advisers from undertaking certain activities unless they are disclosed, either before or after the event as prescribed and, where required, investor consent is obtained.  “Consent” is defined as the approval by a majority in the interest of investors unaffiliated with the adviser. Limited Partner Advisory Committee approval is not sufficient.

Permitted Activities with Disclosure:

• Charging or allocating to the fund the adviser’s regulatory or compliance fees/expenses (Disclose within 45 days of the fiscal quarter end).
• Reduction of the GP’s clawback for taxes (Disclose pre-tax and post-tax clawback amounts within 45 days of the fiscal quarter end).
• Non-pro rata allocations across different funds of investment-related expenses pertaining to the same investment (Disclose before the fact, with an explanation as to why the allocation is equitable).

Permitted Activities with Disclosure and Consent:

• Charging or allocating to the fund fees/expenses relating to government or regulatory investigations of the adviser. Irrespective of disclosure or consent, such charge or allocation is prohibited if the adviser is sanctioned for violations of the Advisers Act or the Rules thereunder (“sanctioned matters”).
• Adviser borrowing from a fund.

“Legacy Status” applies to all existing agreements in place as of the Compliance Date other than those pertaining to “sanctioned matters”, which are not grandfathered.

Recommendation:

Review governing document provisions for prohibited activities and amend as appropriate.

Review and address the allocation and disclosures of adviser-related regulatory or compliance fees and expenses, and the requirement for obtaining and recording investor’s consent, where applicable.

Review and address the methodology and disclosures related to the non-pro-rata allocation of fees and expenses associated with portfolio investments. Review and address GP clawback pre- and post-tax disclosures.

Preferential Treatment Rule

• Applicable to All Private Fund Advisers
• 12-Month Transition Period for Large Advisers (> =$1.5B AUM)
• 18-Month Transition Period for Small Advisers (< 1.5B AUM)

Rule:

Prohibits the provision of preferential redemption terms or additional information on holdings and exposures to certain investors unless: (i) those terms or information rights are offered to all the fund’s investors (including investors in funds with similar portfolios) or (ii) preferential redemption rights are required by law. Other preferential terms must be disclosed to current and prospective investors.  “Legacy Status” applies to all existing “legacy” preferential redemption and information rights agreements in place as of the Compliance Date.  Legacy preferential redemption or information rights are not required to be offered to other investors. However, legacy status does not negate the requirement to notify all investors of other legacy preferential material economic terms.

Recommendation:

Review all existing side letters and investor agreements for preferential and unique terms. Develop disclosures to address the Rules for any side letters and agreements entered into after the effective Compliance Date.

Compliance Rule Amendments

• Applicable to RIAs Only
• 60-Day Transition Period

Rule:

Amends the existing Compliance Rule to require all RIAs, including those that do not advise private funds, to document in writing the required annual review of their compliance policies and procedures.

Recommendation:

Review procedures to verify that the annual compliance review is performed and documented in accordance with the Rules.

Gen II’s dedicated Tax Team excels at partnering with client teams to find pragmatic solutions to tax reporting and operational challenges. Our comprehensive, practical approach focuses on partnering with you to assist with planning and compliance requirements for the combined benefit of all stakeholders. With our deep private equity expertise, knowledge of your unique fund structure, and the maintenance of your fund data, Gen II is uniquely positioned to deliver both your tax and fund accounting needs.

Comprehensive Tax Service

With over 25 experts, our team provides a full range of tax services including U.S. federal tax compliance, state tax compliance, and tax operations.

12 Months Versus 2 Months

Gen II Tax is a year-round relationship. Our teams continuously maintain and monitor your data all year long so you gain surveillance and early insights that can facilitate more timely tax impact decision-making.

Easier on You

When you pair fund administration with tax services from Gen II, the teams coordinate with each other, so you don’t have to. This means information sharing and decision-making become far more efficient and far less time-consuming.

High Efficiency and Early Insight

Gen II Tax Services offers Early Insights, giving our clients a competitive advantage. Early Insights facilitates tax impact decision-making by utilizing a surveillance posture to provide support as needed, when needed.

One-Stop Shop

Utilizing both Gen II’s Fund Services and Tax Services allows for efficient information sharing and decision-making at a global level, without transitioning any work. With direct access to your accounting team, Gen II Tax greatly reduces your time spent coordinating the tax preparation process.

Gen II Tax Services

Gen II Tax Services is a full-service tax offering focused solely on the unique needs of private equity funds and their investors. Our comprehensive, practical approach focuses on partnering with the fund and its managers to assist with planning and compliance needs for the combined benefit of all stakeholders. The team is entirely focused on the complex tax issues facing the private equity industry.

Federal Tax Compliance Services:

• Preparation, signing as Paid Preparer and filing of federal tax returns (Forms 1065, 1120, 1120-F)
• Investor Tax Reporting (K-1, K-3, footnotes, estimates and K-1 equivalents)
• Foreign Information Reporting
• Additional Federal Compliance Services

State Tax Compliance Services:

• Preparation, signing as Paid Preparer, and filing of all state tax returns
• Preparation and filing of state extensions
• Calculation and remittance of state tax payments
• Notice analysis and response

Tax Operations Services:

• Calculation assistance with tax accruals
• Assistance with annual and quarterly audit process
• Calculation and remittance of withholding on investor cash flows, including the administration of W-8IMY look-through withholding
• Monitoring of blocker cash balances for distribution assistance

For more information about Gen II Tax Services, contact us at tax@gen2fund.com

Gen II plans to significantly build out its workforce in the Denver area

Gen II Fund Services LLC will be opening the doors to its new offices at Belleview Station, a lively area that includes restaurants, hotels, shops and apartments, in the Denver Tech Center next month. A provider of fund administration services for leading private equity funds, Gen II plans to significantly build out its workforce in the Denver area and expects professionals to be attracted to its hybrid work model and a culture focused on fostering career growth. The office, located conveniently adjacent to a RTD light rail station, will feature floor-to-ceiling windows that provide staff with beautiful views of the Rockies and an open floor plan that encourages collaboration.

The move to the new location comes nearly two years after Gen II acquired Denver-based Stone Pine Accounting Services LLC, a provider of private equity fund administration, tax, and investor services. Since the August 2021 acquisition, Gen II has added a full-service tax department and actively recruited in Denver. Just in time for summer, the financial services firm has instituted a Denver internship program in its fund accounting and tax departments to nurture young talent.

Supporting the Dynamic Private Equity Market Industry

Gen II’s customer base includes leading private equity firms that play an important role in the global economy and whose investors include pension funds and endowments. Gen II has more than $900 billion of private fund capital under administration and serves more than 200 private equity fund clients. Founded in 2009, Gen II is headquartered in New York, with additional offices in Boston, Dallas, San Francisco, Stamford, Vancouver, and Luxembourg.

As the nation’s largest independent private equity fund administrator, much of Gen II’s growth has been powered by a combination of best-in-class people, processes, and technology. The firm’s experienced team and cutting-edge tools enable private equity fund managers, and general partners, to manage their operational infrastructure, financial reporting, and investor communications more efficiently. The funds Gen II services include a variety of asset classes including private equity, private credit, and real estate.

With the recent tumult in financial markets these private equity firms have experienced even greater demands from investors and Gen II is helping them deliver “on-demand” granular information about the performance of funds and their holdings. General partners at the funds rely on Gen II to deliver data in a customized formats which help them build trust and deepen relationships with investors. Packaging and delivering the right data and quality information in real time requires technical and human resources many private equity general partners do not have. That is where Gen II plays an important role.

Gathering massive volumes of data for general partners at private equity firms is enabled by Gen II’s web-based reporting solution, Sensr®. This innovative fund administration technology helps summarize data in a granular fashion enabling general partners to fluidly deliver reports on funds, fund families and investments to investors.

A Diverse Workforce That Matches Its Increasingly Diverse Client Base

Gen II’s expansion in Denver and other markets involves building a diverse workforce that reflects its increasingly diverse client base. Gen II has built a truly diverse workforce. Of its more than 1,000 employees, 45 percent are female, and two-thirds identify as people of color.

In Denver as elsewhere, Gen II will look to attract a diverse pool of candidates as it lays the foundation for future growth in the region.

Gen II BootCamp & SkillsMatch Program

The new Gen II facility will include a learning and training center that will be Gen II Global Training Center of Excellence. The knowledge and computational skills required to provide accurate, bespoke private equity fund administration are highly specialized. As these skills are typically not taught at universities or colleges, Gen II utilizes its own “boot camp” training program to prepare its new fund accountants for sophisticated fund work. Last year, 288 fund professionals participated in 39 client service boot camps.

Gen II also offers a “Skillsmatch” program, in which employees can reach out to self-identified subject matter experts within the company for assistance, as needed. In addition, Gen II’s “Mentoring Circles” program offers professional skills building, strengthening of relationships and career growth in a small group setting. Gen II is also developing continuous learning programs as well as initiatives focused on customized professional skills, leadership, and management as well as additional technical training.

Gen II’s growth as an industry leader is rooted in an ability to harness the soft skills of its leadership and staff. These include being proactive, nimble, obsessed with quality, bold and ambitious. Other soft skills that are highly valued include exercising superior judgement and being able to make data-based decisions.

As part of its unique culture, Gen II is highlighting the importance of building trust, collaboration and community among employees, who are encouraged to own their careers and build a partner with their managers and team members so that everyone can succeed and continue to drive the firm’s growth. Another key part of Gen II’s culture and competitive advantage is fostering career progression and promoting from within. At the end of 2022, more than 300 people across the firm were promoted.

Once employees have joined Gen II, a key player in the financial services industry, they become owners of the company and have a direct link to value creation by being a part of its equity incentive plans starting at the senior fund accountant level. Employees are also able to provide feedback in monthly surveys to make their voice heard and drive an inclusive culture. Last year, the company also launched a monthly recognition program that celebrates top performers’ hard work, dedication, and success.

Gen II’s culture celebrates leadership, entrepreneurial spirit, innovation, and the highest commitment to client service. If you’re beginning your career, re-entering the workforce or are an experienced professional looking for a change, Gen II might just be the right place for you.

To learn about careers at Gen II, visit: https://gen2fund.com/careers/

At Gen II, we are fostering a diverse and inclusive environment where all of our employees have the opportunity to make an impact, grow in important ways and thrive in a community. In this spirit, we have launched a number of women leadership initiatives during Women’s History Month 2023, including sponsoring and attending the Women in Private Equity summit in San Diego and hosting a new series of conversations with Gen II women leaders.

In our first conversation to celebrate International Women’s Day on March 8, Gen II hosted an Embrace Equity panel discussion featuring four of New York’s Top 50 Women Leaders of 2022, as named by Women We Admire. Moderated by Anne-Claire Berg, Gen II’s Chief People and Impact officer, the participants included:

• Tanya Chakraborty, Senior Vice President of Emerging Money Movement Product Strategy at U.S. Bank
• Jody Gunsberg, Managing Director, Coindesk Indices
• Hazel Jack, Vice President of University Communications and Events at Colgate University

These accomplished leaders discussed their career journeys, the social and economic benefits of improving equity in the workforce, and advice for future women leaders. Below are highlights from this insightful discussion.

Some Progress, Yet Much Work Remains to Be Done

The panel reflected on the advancement of women in the workplace, noting that in 2021, the U.S. ranked 31 out of 38 OECD countries for female labor participation. If the female labor participation rate in the U.S. rose to the levels seen in other OECD countries, such as Norway, this would increase U.S. GDP growth by 0.2 percentage points annually. And that would come out to a cumulative $455 billion in output above the baseline forecast.

Female Leadership and Its Impact

Each individual has their own leadership style, and the panelists agree – authenticity is critical. Every new generation has different expectations for their leaders and employers. For younger generations, the values and ethics of an organization matter. Statements must be backed up by equity in action, and leaders play an essential role in following through and driving change.

The panelists discussed the value women’s leadership brings and how it impacts an organization and its bottom line. Studies have found that firms with more women on their boards tend to outperform those without by a significant margin and that organizations with greater gender diversity among senior leaders are more profitable. Upon deeper analysis, one of the key benefits is not only improved financial performance but also de-risking. Typically, companies with more women board members have more accountability, oversight processes and transparency. Organizations with more female leadership typically have reduced the likelihood of lawsuits, reputational scandals, and corporate crimes. So, from a value creation standpoint, whether it’s de-risking or improving the bottom line, embracing equity and diverse perspectives in leadership roles makes a lot of sense.

Balancing Life and Career

As leaders at their organizations, the panelists raised the question of balancing a career and life outside the office and whether someone can have it all. Individuals may have different visions of what “having it all” looks like, so understanding and prioritizing what is important and then taking steps to achieve one’s goals can provide a foundation. Regardless of one’s situation, women have typically shouldered a larger portion of family and social tasks outside of work, which makes finding balance even more challenging.

The biggest obstacle for women to fully participate in the labor force in the U.S. is children – mainly because the U.S. is the only country in the OECD that doesn’t provide income support during maternity or parental leave by law. While governments and companies offer varying levels of support for maternity leave and childcare, women can help their colleagues by having discussions and planning with those who may be taking time off, providing flexibility when they return and considering how teams and work are divided.

Advice for Future Women Leaders

The panelists shared advice and lessons that will always remain relevant. First, have gratitude, reflect and realize progress and daily successes, and keep the bigger picture in mind. Across any industry, engage and build a rapport with colleagues and management. Find mentors, sponsors, and advocates, and not just necessarily women; seek a diverse group of mentors with different viewpoints. Lastly, be a role model and take it a step further by recognizing and helping other women. Embracing equity and supporting others creates a virtuous cycle where we can all help lift those around us.

Panelists reflected on how long it has taken for women to advance in the workplace and noted that it can be difficult to imagine oneself in a position women might not have held in the past. The hope is that in 10 years, we’ll see more women leading organizations and more women from every background with different perspectives appointed to boards who can create opportunities for all of us.

Digital solutions and data management have become strategic advantages in private markets as limited partners favour sponsors that can facilitate timely access to financial data and portfolio information, says Christophe Ponticello of Gen II Fund Services.

Today, increasingly volatile and rapidly changing financial markets are contributing to the private market’s reliance on digital platforms and solutions, particularly as limited partners (LPs) have come to expect agile and intuitive processes that enable customised reporting and improved portfolio transparency.

While Luxembourg has always had a private equity (PE) presence, its role as a PE epicentre has grown since Brexit. As a rapidly growing domicile for private equity and venture capital investment funds, digitisation plays a key role in fund launches, regulatory and compliance support, and investor reporting.

Also, as the private markets have grown and diversified over time, the increasing number of private equity investment options by geography, strategy and ever-larger funds have given investors more choices than ever. As a result, digital solutions and data management have become strategic advantages as limited partners favour sponsors that meet increased expectations, offer transparency and can readily facilitate timely access to financial data and portfolio information.

Managers clinging to legacy processes will be left behind

While raw data in spreadsheets and manual processes may have been acceptable in the past, the pandemic set in motion changes to how limited partners and general partners (GPs) communicated. Digital platforms were able to offer access to consolidated data, enable general partners to communicate on a weekly basis and even provide on-demand performance updates. As a result, investors have become accustomed to and have come to demand transparency and real-time accessibility to data. Fund managers that cling to legacy manual processes will be left behind in this highly competitive environment.

The current economic challenges are putting further pressure on fundraising as GPs face increased competition for capital. Last year, private equity fundraising activity fell 58% in the first nine months, according to Preqin’s 2023 ‘Global Equity Report’, which estimates that the number of investors expecting to have increased allocations to the asset class over the next 12 months has declined.

A well-run back office is a critical success factor for emerging managers in the current economic environment. According to our research, only one in ten respondents secured a commitment four months after an introduction – far below the 31% who did so in 2021.

In addition to accessibility, market participants have seen the benefits of digitisation over unstructured and disorganised data. Digital systems make the data usable, digestible and accessible, attributes that are necessary when funds must increase their efficiency, manage complexity and deliver information in real-time amid changing market conditions. LPs now expect that they can readily download cash flows or get a single view of their investment holdings, and they’ll expect GPs to enable this level of easy access.

Singular focus 

For fund managers – whether they are building a presence in Europe or other markets – digitisation is not always a solution that can be developed and implemented in-house. The evolution of how data is shared and parsed calls for developing infrastructure, training and staff with a singular focus. And assembling it in-house requires building costly digital infrastructure, specialised expertise and is resource-intensive.

The increased complexity and the vast amount of data created by the rapid evolution in the private markets means GPs will need to be flexible and agile enough to handle any new products, channels, investors or regulatory requirements.

About

Christophe Ponticello is Country Head of Gen II Luxembourg Services S.a r.l. of Gen II Fund Services. Gen II is a leading fund administration provider focused entirely on serving private capital asset managers and investors, enabling clients to realize greater levels of control, quality, consistency, efficiency, and transparency throughout their business.

This article originally appeared in Funds Europe. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Funds Europe providing the information in this content accept no liability for any decisions taken in relation to the above.