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    Jan. 9, 2025

PE Industry in 2025: Trump Administration’s Likely Impact on Rulemaking, Examinations and Enforcement (Part One of Two)

The SEC’s dominant status as a regulator has always forced the PE industry to be aware of the agency and reactive to its whims. The industry is now trying to find its footing with a highly volatile version of the Commission, however, which is toggling from the aggressive stance and tactics under Chair Gary Gensler to a potentially less hostile approach under the incoming Trump administration and its anticipated appointee to head the agency, Paul Atkins. That change has a material impact on multiple facets of sponsors’ operations and trickles down to the SEC’s potential rulemaking initiatives, examination priorities and enforcement efforts. To help sponsors prepare for what to expect in the new year, the Private Equity Law Report interviewed Debevoise partners Julie Riewe, Marc Ponchione and Justin Storms. This first article in a two-part series considers how the incoming Trump administration will impact the SEC’s rulemaking efforts, as well as the nature and focus of the Commission’s examination and enforcement practices in 2025. The second article will evaluate the latest trends in GP‑LP negotiations, sponsors’ efforts to access retail capital, and compliance practices for GCs and CCOs to prioritize in the new year. See “SEC 2025 Examination Priorities Feature Essential Compliance Concerns, Emerging Technologies and Several Notable Omissions” (Dec. 12, 2024); and “What’s Next for the SEC? A Look at the Latest Reg Flex Agenda” (Oct. 3, 2024).

Potential Areas of Scrutiny in Future SEC Examinations of PE Sponsors

The SEC’s Division of Examinations continues to build its expertise around private funds and actively pursue its examination program. Although the industry expects SEC examinations to be less aggressive under the Trump administration, several topics and issues will remain at the forefront of examiners’ efforts. It behooves fund managers to remain vigilant as to those and other potential compliance issues to head off any potential scrutiny. The Practising Law Institute (PLI) recently hosted a panel as part of its Hedge Fund and Private Equity Enforcement & Regulatory Developments 2024 program to discuss hot topics and focus areas in recent exams, as well as advice on navigating the examination process and tips for effectively engaging with staff. The panel was moderated by Schulte Roth partner Marc E. Elovitz and featured Ken C. Joseph, managing director and head of U.S. regulatory consulting in the financial services compliance and regulation practice at Kroll; Sidley Austin partner Ranah L. Esmaili; and Maurya C. Keating, Associate Regional Director of the SEC’s New York Regional Office. This article summarizes relevant takeaways for PE sponsors from the discussion. For coverage of previous PLI programs, see “To Work Effectively, CCOs Need Authority, Autonomy and Information” (Dec. 12, 2024); and “Tips for Enduring an SEC Examination With the Lightest Possible Ramifications” (Nov. 30, 2023).

Downward Pressure on Management Fees and Carried Interest Rates Evident Across Asset Classes (Part One of Two)

At times it is easy to be lulled into a narrow view when considering trends and market dynamics, with little movement apparent over shorter timelines. That is particularly true for fund economics, as many do not perceive them to be a major point of contention in current GP‑LP negotiations. That changes, however, if you zoom out to a longer time frame that can amplify actual market shifts. For example, average management fee rates have declined across most asset classes over the last 20 years, and management fee rates for real estate and PE funds are now at their lowest point since 2005. Those types of developments and trends in both economic and non-economic private fund terms were examined by Preqin in its 2024 Private Capital Fund Terms Advisor report (Report), along with a webinar that elaborated on the Report findings which featured Brigid Connor, assistance vice president, fees research lead; and Heather Heys, vice president, legal insights. This first article in a two-part series summarizes the trends and differences in management fees, performance fees and attendant fee-related considerations across PE, private debt and real estate funds. The second article will examine how a shift in GP and LP dynamics have manifested in changes in fund formation practices and governance provisions in fund documents. See “Recent Survey Shows Market Adversity Is Tempering LPs’ Ability to Negotiate Key PE Fund Terms” (Sep. 5, 2024).

Emerging Industry Trends Include Rise of Evergreen Structures, Tax Complications and Private Credit Funds

A panel at the K&L Gates New York Asset Management and Investment Funds Conference examined evolving trends in the private funds industry and the outlook for 2025. The speakers focused on the increasing popularity of evergreen funds among sponsors and investors; the challenging fundraising environment; new approaches to addressing tax-related concerns of non‑U.S. investors; the burgeoning private credit market; and the increasing use of various mechanisms to provide liquidity to investors. The program featured K&L Gates partners Ed Dartley, TJ Bright and Adam J. Tejeda. This article distills their insights. See “2024 Survey Reveals Top Compliance Concerns and Common Industry Practices” (Sep. 19, 2024).

Inadequate MNPI Policies Cost CLO and Private Fund Adviser $1.8 Million

Section 204A of the Investment Advisers Act of 1940 requires advisers to adopt and implement written policies and procedures reasonably designed to prevent misuse of material nonpublic information (MNPI). The SEC’s recent settlement with a private fund adviser “demonstrates the SEC’s focus on the risk of MNPI misuse in the fast-growing private credit market,” Elizabeth L. Mitchell, partner at WilmerHale, told the Private Equity Law Report. The adviser, which also manages and trades collateralized loan obligations (CLOs) and pursues other credit strategies, sold certain CLO tranches while in possession of MNPI concerning one of the companies whose debt was held by the CLO. A day after the sale, that information became public, leading to a drop in value of the CLO – and a threat of legal action from one of the adviser’s counterparties. Although the adviser had general insider trading policies, those policies did not require it to consider whether MNPI about a borrower whose debt was held by a CLO was material to a sale of a tranche of such CLO, the SEC claimed. This article discusses the adviser’s alleged compliance failures and the terms of the settlement, with additional commentary from Mitchell. See “Risk Alert on Private Funds: Focus on Conflicts; Fees and Expenses; and MNPI (Part One of Two)” (Aug. 25, 2020).

Alston & Bird Bolsters Its Private Funds Expertise in New York

Alston & Bird has announced the addition of Sam Roh as a partner in its investment funds group in the firm’s New York office. He focuses his practice on structuring, forming and marketing private investment funds, including venture capital funds, PE funds, hedge funds, hybrid funds and funds of funds. See our two-part series on closed-end funds of PE funds: “Relative Merits of Registration Options and an Infinite‑Life Structure” (Jun. 2, 2020); and “Considering Bespoke Valuation, Co‑Investment, Director and Tax Issues” (Jun. 16, 2020).

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