In an effort to expand the access of ordinary retail investors to private funds, Reps. Anthony Gonzalez, R-Ohio, and Gregory Meeks, D-N.Y., have introduced a bipartisan bill that would allow closed-end funds to invest in them.
The new bill would override Securities and Exchange Commission regulations, based on the Investment Company Act of 1940, that restrict access private fund access to accredited investors only. The bill would also amend current regulations that limit closed-end funds’ investments in private funds to 15% of their net assets unless the fund sells shares to accredited investors with minimum initial investments of at least $25,000.
Accredited investors are currently defined as individual investors who earned $200,000 or more per year (or $300,000 for a couple) in each of the two prior years or have a net worth of over $1 million alone or with a spouse, excluding private residences, or are investment professionals in good standing holding Series 7, 65, or Series 82 licenses or are “knowledgeable employees” of a private fund.
The Increasing Investor Opportunities Act (H.R. 4262) is essentially the same bill that Gonzalez introduced in the last Congress, H.R. 8786, but the written text of the new bill is not yet available.
In the original bill, the amendments to the Investment Company Act would take effect two years after the bill is enacted or earlier if the SEC chose to adopt the changes earlier in the name of the name of public interest or for the protection of investors.
When Gonzalez introduced the bill in the 2019-2020 Congress, he explained that “over the last 25 years, the number of publicly listed companies has significantly decreased, and more companies are waiting to go public later in their business life cycle … which has resulted in everyday Americans not having the same investment options as they once did.”
The number of publicly listed companies trading in the U.S. has fallen about 50% between 1996 and now, from roughly about 8,000 stocks to around 4,000. The Wilshire 5000 index, which had 5,000 stocks when it debuted in 1974, now has about 3,500 stocks.
The Investment Company Institute (ICI), which represents mutual funds, exchange-traded funds, closed-end funds and unit investment trusts in the U.S. and similar funds offered to investors in jurisdictions worldwide, applauded the introduction of the new bill.
ICI President and CEO Eric J. Pan said in a statement that the bill “will help expand opportunities for Main Street investors to access private investments through closed-end funds, while maintaining the important protections for investors that only regulated funds provide pursuant to the Investment Company Act.”
He also supported the bill for strengthening “the closed-end fund structure by eliminating a loophole that activist investors have used to extract short-term profits at the expense of retail investors.”
The new legislation would restrict activist investors and their affiliates to acquiring no more than 10% of a closed-end fund, putting them in the same position as registered funds and their affiliates.
According to the ICI, activist investors such as hedge funds have been able to acquire large positions in closed-end funds at discount to to the fund’s net asset value, then subsequently try to force the fund to take actions that let the activists sell their shares at prices at or near NAV, converting the fund to an open-end fund or liquidating the fund. Such a “takeover strategy and concentrated voting power” can force securities sales or other measures that provide the liquidity necessary to cash out,” which hurts shareholders who want to remain in the fund, according to the ICI.
In the retail market, private equity remains the domain of institutional investors like pension funds, but asset managers like Vanguard and Macquarie are now expanding that access to individuals who are accredited investors or qualified investors. J.P. Morgan Asset Management recently launched J.P. Morgan Private Capital for institutional and high-net-worth clients, which will also provide the unit the ability to invest the firm’s capital alongside those investors.