SEC Oversight of Private Equity and Hedge Funds

Abstract:

We examine the effect of Securities and Exchange Commission (SEC) investigations on private fund investment advisers’ fundraising. We propose that SEC oversight could improve advisers’ disclosure and governance, facilitating capital formation. However, private fund investors may focus on private communication with fund advisers or attributes other than disclosure and governance, suggesting no effect of SEC oversight on fundraising. Consistent with benefits of SEC oversight, we find an increase in fundraising for investigated advisers following SEC investigations. Consistent with our proposed mechanisms, we find an increase in advisers’ governance over financial reporting as well as an increase in disclosure transparency following investigations. Increases in fundraising concentrate in advisers with improved disclosures. Altogether, our evidence suggests that SEC investigations provide indirect oversight of advisers, improving information for private fund investors and facilitating capital formation. These results provide new insight for regulators as they increasingly focus on private markets.

Authors:

Owen Davidson, Baylor University
Paul Mason, Baylor University
Steven Utke, University of Connecticut
Nina Xu, University of Connecticut