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How New SEC Regulations Elevate the Importance of Valuation Services for Private Fund Advisers

By Michael Henrickson, Jake O’Donnell, on November 7th, 2024

Recent amendments by the Securities and Exchange Commission (SEC) to the Investment Advisers Act of 1940, effective from November 2023, introduce stringent requirements for private fund advisers. These rules are designed to enhance transparency, competition, and efficiency within the private funds market, significantly amplifying the role of valuation services and fairness opinions in compliance and investor decision-making.

Compliance Requirements

Private fund advisers registered with the SEC are now mandated to provide quarterly statements detailing fund expenses and performance to investors. The rules also prohibit preferential treatment that could negatively impact other investors. These updates, while increasing compliance obligations for private equity funds, align with the growing investor demand for timely and precise information amid fluctuating interest rates, lower multiples, and a rise in continuation fund and secondary transactions.

The Role of Valuation Services

Key to these regulations is the requirement for fairness or valuation opinions in adviser-led secondary or continuation fund transactions. An independent third-party must issue these opinions, ensuring that investors receive unbiased assessments when deciding whether to sell their interests in the private fund or exchange them for new interests in a vehicle managed by the same adviser.

Quarterly Statement Rule

The SEC’s Quarterly Statement Rule requires private equity firms to furnish LPs with detailed quarterly statements. While the SEC does not mandate valuation opinions for these statements, providing them can offer a competitive edge by delivering clear, reliable assessments that facilitate informed decision-making. This approach caters to the increasing sophistication and information demands of investors.

Final Thoughts

The SEC’s new regulations underscore the essential role of valuation services in the private equity sector. Independent third-party valuation and fairness opinions not only help private fund advisers meet regulatory requirements but also enhance transparency and investor trust. As the industry adapts to these changes, robust valuation practices will be pivotal in maintaining investor confidence and supporting informed investment decisions.

If you need further guidance or have any questions, please do not hesitate to reach out.

 

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

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Jake O’Donnell
Consulting Manager

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