House bill would ease disclosure requirements for minority-stake sales

A bill that likely will be coming back to the U.S. House of Representatives this year could ease disclosure requirements for GPs that sell stakes in their management companies to third parties.

Sales of minority stakes in GP management firms are one of the biggest trends in the industry, with several firms raising billions of dollars to buy such holdings.

HR 5424, the Investment Advisers Modernization Act, passed the House last year but was never picked up in the Senate. It was sponsored by Rep. Robert Hurt (R-Virginia), who retired at the end of 2016.

A co-sponsor of the bill, Rep. Randy Hultgren (R-Illinois), may sponsor the bill this year, according to one source who tracks legislation affecting the private equity industry.

Jameson Cunningham, Rep. Hultgren’s spokesman, was noncommittal. The congressman “is talking with his colleagues about what makes sense this Congress,” Cunningham said. “He is still supportive of the general intent of the previous bill he co-sponsored.”

The House version that was approved last year was amended. The final version of HR 5424 would have directed the SEC to amend certain regulations for PE and private investment firms.

Perhaps most significant, HR 5424 would have eased disclosure requirements on transfer of ownership, eliminating disclosure requirements for minority investments. Generally, the disclosure threshold starts at 25 percent, so almost every strategic stake sale that has occurred in the private equity industry has fallen outside SEC rules. Most minority stakes sales today range 10 percent to 20 percent.

The bill also enables LPs to consent to changes in control when they commit to a PE fund, rather than when the change in control actually happens.

The bill also would remove audit requirements for private funds that establish they are holding the assets they claim to be holding. As well, it would remove the requirement that managers with more than $2 billion in assets under management complete a Form PF.

Disclosure of stake sales in the PE industry is governed by what’s written in fund documents, sources said. And that is more for change-in-control scenarios, rather than minority sales, according to an LP with knowledge of such sales.

Most sources say that GPs usually inform their LPs about a planned minority-stake sale as a courtesy, but that GPs are not obligated to disclose such a sale.

Disclosure “comes after the fact; they don’t tell us beforehand,” said an LP who has been through GP-stake sales. It’s like, “‘oh, by the way, here’s what we did and why we did it,’” the LP said.

Action Item: Read last year’s bill here: www.congress.gov/bill/114th-congress/house-bill/5424

President Donald Trump addresses a joint session of Congress on Feb. 28, 2017. Photo courtesy Reuters/Kevin Lamarque