Insights on how private markets investors can use data-first technology to address imminent regulatory changes.
At the end of 2020, the Securities and Exchange Commission (SEC) announced changes to modernize its marketing rule for investment advisers through long-awaited reforms that went into effect on May 4, 2021. Following an 18-month transition period, investment advisers are imminently preparing to comply by November 4, 2022.
To keep pace with an evolving industry that’s seen the rise of technology, social media, and more diverse profiles of investment advisers, the updated rule reinforces the general prohibitions around advertising practices. In addition, the SEC also added guardrails around using testimonials and endorsements, third-party ratings, and performance-related advertisements.
With an updated definition of “advertising,” the modernized rules mean the SEC has more clearly articulated marketing and fundraising guidelines for private fund advisers – a change that adds regulatory clarity to this fast-growing investment segment.
Rules Governing Performance Advertising
To help investors evaluate and compare investment opportunities, the marketing rule puts parameters around how advisers circulate performance-related advertisements, including segmented, hypothetical, related, and predecessor performance.
Advisers who include performance must advertise the results in a fair and balanced manner, and the information must be relevant to the audience’s investment objectives. In addition, advisers must include net performance information whenever they present gross performance. However, unlike other performance advertisement requirements, private funds are not required to present 1-, 5-, and 10-year returns since recent performance could be misleading in some instances. Nevertheless, private funds may not cherry-pick periods that performed more favorably since the information would not be fair and balanced.
To respond to the numerous changes, firms will need nimble tools to ingest large volumes of information, resolve data quality issues, and aggregate and organize the data. Access to various metrics will also be vital to calculating and presenting performance results.
“In response to increasing complexity and industry demands to report their performance track record to various audiences, private market investors are looking for a flexible, auditable data and analytics platform,” explains Cesar Estrada, Private Markets Segment Head at Arcesium. “Tools that deliver powerful analytics and the ability to create dynamic reporting become invaluable as firms respond to an evolving regulatory environment,” says Cesar.
Responding to Changing Industry Demands
In a recent Private Equity Wire survey, supported by Arcesium, research among 50 private equity stakeholders found that GPs are increasingly turning to external partners. While support often begins in the back office, firms find an experienced partner beneficial in other business areas – especially as complexity increases.
In fact, 16% of survey respondents reported using data science and technology partners for fundraising and investor relations. While arguably still a low number, fundraising has long been a function performed in-house. A technology partner can provide much-needed support when it comes to complex data ingestion, reporting, and disclosures that often require a quick turnaround, and the ability to collaborate across teams and with experienced professionals.
Working with a Trusted Partner
As fund managers expand their portfolios across vintages and asset classes, their ability to quickly digest information and produce accurate reporting at scale becomes a challenge. With high volumes of data and a quick disclosure turnaround, there is a higher risk of errors on crucial reporting requirements.
To help you confidently address the new marketing rule, Arcesium’s unified data platform is designed to enable you to ingest data across asset classes and administrators and drill down into underlying operational and referential information. We engineered our pre-defined data model to normalize your incoming raw information, which you can extend per each fund’s needs. In addition, our powerful data validation tools were developed to deliver a golden source of truth that’s consistent, auditable, and readily available to help you scale operations and turn information into insight.
Working with your team, we help establish your connectivity, data mastering, and analytics needs to automate reporting with the click of a button. Flexible business intelligence tools also enable you to configure a range of performance metrics, including IRR and multiples, and give you the agility to calculate and present performance in various dimensions, such as gross and net.