Private Equity and Capital Markets Policy

Private Equity and Capital Markets Policy

Private Equity and Capital Markets Policy
March 28, 2022
Private equity (PE) is a type of private fund, meaning a fund that generally pools money from
institutional and individual investors that meet certain criteria indicating they are more
Eva Su
sophisticated and able to invest in companies that are often not publicly traded. PE investors
Analyst in Financial
could include pension funds, other private funds, foreign institutions, high-net-worth individuals,
Economics
insurance companies, and nonprofits.

The term private equity can be used to describe a variety of funds. For example, some observers

use the term to describe all types of private funds. Others discuss PE as one type of fund within
the broader categorization of private funds that also include hedge funds, venture capital, liquidity funds, and family offices.
This report uses the terminology set forth by the asset management industry’s primary regulator, the Securities and Exchange
Commission (SEC), which separates PE from other private fund types. Under this definition, PEs typically take a controlling
interest in an operating business, also known as a portfolio company, and engage in financial and operational activities with
the hope of increasing the company’s value. PEs are known for active ownership, longer investment time horizons, and
financial leverage through the use of debt, but other PE investment and operational styles also exist.
The PE industry grew in size in recent years, including during the COVID-19 pandemic. According to the SEC, between
2016 and 2021 (first quarter), the total number of PE funds increased by more than half to nearly 16,000. The aggregate gross
fund assets more than doubled to almost $5 trillion during that period.
Many research papers suggest that PE plays a role in enhancing competition, enabling capital formation, assisting distressed
company resolution, and transforming financially underperforming companies. The PE industry has also increased in
importance because of the significant growth of the private securities and private funds markets.
Some observers have raised financial stability concerns in light of the industry’s growth in size, importance, and complexity.
The PE industry also faces additional policy debates regarding its performance records, operational practices, and industry-
specific issues, including the compatibility of PE’s profit maximization practices with certain public-service-oriented
industries. Many aspects of PE’s operating and financing model, which focuses on value creation for investors, attract
policymakers’ attention. Below are some examples:
 Capital restructuring. PE sometimes restructures portfolio companies’ debt and equity to manage the total
cost of capital, draw down capital not yet invested, or negotiate with lenders to gain more flexibility for loans.
Some observers view the process as a way to extract wealth from portfolio companies while transferring the risk
from equity investors to debt investors. Other observers view excessive leverage (e.g., debt borrowing) as a
financial stability concern because it could reduce the portfolio companies’ ability to absorb risks during
adverse market conditions.
 Operational changes. PE sometimes increases productivity through cutting jobs, selling non-core assets, or
making adjustments to the portfolio companies’ business strategies. Some observers view cost savings through
job cuts as a way to enrich the investors while bringing harm to affected individuals and communities.
 Incentive allocation. PE provides equity and other incentives for portfolio company managers and investment
advisers managing the funds. Some observers view certain investment fund manager incentives and fees as
potentially excessive, non-transparent, and rife with conflict of interest concerns.
 Exit strategy. PE seeks to find the opportunistic timing to sell the portfolio companies through mergers and
acquisitions, initial public offerings, or secondary offerings to other PE firms, or they may seek a partial exit
through dividend recapitalization, among other methods. Some observers are concerned about certain exit
strategies, such as dividend recapitalization, which allows portfolio companies to borrow more debt to pay
dividends to equity investors.
The SEC has proposed reforms to bring increased transparency and risk oversight to this capital market segment. Many
observers predict that these agency actions would transform the PE regulatory philosophy and practice.
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Contents
Terminology .................................................................................................................................... 1
Industry Size, Investors, and Performance ...................................................................................... 2
Size ............................................................................................................................................ 2
Investor Composition ................................................................................................................ 2
Investment Returns .................................................................................................................... 3
Risk Measures ........................................................................................................................... 4
Regulatory Framework .................................................................................................................... 5
Reporting Requirements ............................................................................................................ 5
Other Operational Compliance.................................................................................................. 5
Operating and Financing Structure .................................................................................................. 5
Private Equity versus Other Funds ............................................................................................ 6
Leveraged Buyout ..................................................................................................................... 6
Dividend Recapitalization ......................................................................................................... 6
Value Creation Process .................................................................................................................... 7
Calculation Methods ................................................................................................................. 7
Attribution Analysis .................................................................................................................. 8
Policy Issues .................................................................................................................................... 9
Potential Benefits ...................................................................................................................... 9
Example: Hilton Hotels..................................................................................................... 10
Potential Challenges and Concerns ......................................................................................... 10
Example: Toys“R”Us ........................................................................................................ 12
Example: Trident USA ...................................................................................................... 12
Industry-Specific Debates ....................................................................................................... 13
SEC Proposed Rules ...................................................................................................................... 13
Private Fund Reform ............................................................................................................... 13
Traditional Regulatory Philosophy ................................................................................... 14
Proposed Amendments to the IAA ................................................................................... 14
Policy Debates About Private Fund Reform ..................................................................... 15
Form PF Reform ..................................................................................................................... 17
Why Is Form PF Important? ............................................................................................. 17
Proposed Amendments to Form PF .................................................................................. 18
Policy Debates About Form PF Reform ........................................................................... 18

Figures
Figure 1. Private Equity Growth Trend ........................................................................................... 2
Figure 2. Private Equity Investor Composition ............................................................................... 3
Figure 3. U.S. Private Equity Buyout Performance ........................................................................ 4
Figure 4. Dividend Recapitalization ................................................................................................ 7
Figure 5. Examples of PE Value Creation Attribution and Policy Issues ........................................ 8

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Contacts
Author Information ........................................................................................................................ 19

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This report examines the private equity (PE) industry’s terminology, size, performance, and
operational and regulatory structures. It also discusses selected policy issues relating to PE
business practices and industry-specific debates. Following the general discussion of policy
issues, the report presents three real-world examples to demonstrate policy observations in the
context of actual events. In the first quarter of 2022, the industry’s primary regulator, the
Securities and Exchange Commission (SEC), proposed multiple PE reform initiatives. The report
concludes with a discussion of two SEC proposed rules and their policy implications.
Terminology
PE funds are pooled investment vehicles that gather money from investors and invest in
companies that are often not publicly traded. PEs typically take a controlling interest in an
operating business, also known as a portfolio company, and engage in financial and operational
activities with the hope of increasing the company’s value.1 PEs are known for active ownership,
longer investment time horizons, and financial leverage, but other PE investment and operational
styles also exist.2
The term private equity in this report refers to a type of private fund that pools money only from
accredited investors and qualified clients (e.g., institutional and individual investors that meet
certain criteria indicating their relatively high net worth or professional knowledge) and invests
the money on behalf of the fund.3 PE investors could include pension funds, other private funds,
high-net-worth individuals, foreign institutions, nonprofits, and insurance companies (Figure 2).
Private funds stand in contrast to public funds, such as mutual funds, in which the general public
can invest.4
Some observers use the term private equity to describe all types of private funds.5 Others discuss
PE as a categorization of private funds that also includes hedge funds, venture capital, liquidity
funds, and family offices. In general discussions, these private fund types are sometimes not
mutually exclusive. This report uses the terminology set forth by the asset management industry’s
primary regulator, the SEC, which separates PE from other private fund types.6

1 SEC, Private Equity Funds, https://www.investor.gov/introduction-investing/investing-basics/investment-products/
private-investment-funds/private-equity.
2 Financial leverage generally refers to the use of debt to buy more assets or fund existing operations. Other forms of
leverage measures also exist. For more information, see Adam Hayes, “Leverage,” Investopedia, March 19, 2021,
https://www.investopedia.com/terms/l/leverage.asp.
3 For more on accredited investors, see CRS In Focus IF11278, Accredited Investor Definition and Private Securities
Markets, by Eva Su. Qualified client means a person or a company that has at least $1 million under the management
with an investment adviser or has a net worth of more than $2.1 million. For more details, see 17 C.F.R. §275.205-
3(d)(1) and SEC, Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the
Investment Advisers Act of 1940, https://www.sec.gov/rules/other/2016/ia-4421.pdf.
4 For more discussion on public and private funds, see CRS Report R45957, Capital Markets: Asset Management and
Related Policy Issues, by Eva Su.
5 For example, some experts define private equity as an alternative asset class that includes all assets beyond the three
primary asset classes—stocks, bonds, and cash. For more details, see Benoit Leleux, Hans van Swaay, and Esmeralda
Megally, Private Equity 4.0: Reinventing Value Creation (The Wiley Finance Series, 2015).
6 SEC, Form PF – Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators
and Commodity Trading Advisors, https://www.sec.gov/files/formpf.pdf.
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Industry Size, Investors, and Performance
Size
The PE industry grew in size in recent years, including during the COVID-19 pandemic.
According to the SEC, between the first quarter of 2016 and the first quarter of 2021, the total
number of PE funds increased by more than half to reach almost 16,000, and the aggregate gross
fund assets more than doubled to reach $4.8 trillion (Figure 1).7
Figure 1. Private Equity Growth Trend
Gross Asset Value and Number of Funds

Source: CRS based on data from SEC private funds statistics, https://www.sec.gov/divisions/investment/private-
funds-statistics.shtml.
Investor Composition
The largest PE investor types are pension plans, other private funds, foreign institutional
investors, insurance companies, U.S. individuals, and nonprofit organizations. These investors, in
aggregate, held around 76% of the PE industry total assets as of first quarter 2021, according to
the SEC’s private funds statistics (Figure 2).8

7 SEC, Division of Investment Management, Private Funds Statistics, https://www.sec.gov/divisions/investment/
private-funds-statistics.shtml.
8 SEC, Division of Investment Management Analytics Office, Private Funds Statistics First Calendar Quarter 2021,
November 1, 2021, https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q1-
accessible.pdf.
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Figure 2. Private Equity Investor Composition
Beneficial Ownership for Private Equity Funds as a Percent of Aggregate Net Asset Value

Source: CRS based on data from SEC private funds statistics, https://www.sec.gov/divisions/investment/private-
funds-statistics.shtml.
Note: As reported on Form PF for first quarter 2021.
Investment Returns
Because PE information availability and disclosure requirements are not the same as for public
funds, measuring its investment return involves challenges, and how well PEs perform relative to
public funds is an area of debate. Certain academic research suggests that PEs have not
outperformed public equity since at least 2006,9 while other studies suggest that PE funds
significantly outperformed public equity.10 Divergent findings in different studies may be related
to their use of different (1) definitions for PE, (2) PE performance data sources, (3) public equity
benchmarks, and (4) measurement time periods.11
According to a calculation by an investment management firm published in June 2021 and using
data from an academic study, since the mid-1990s, PE investment returns have ranged between
approximately 1.3 times and 2.0 times the invested capital (i.e., multiples of invested capital over
the life of the PE investments from the initial investments in portfolio assets to the final exit) and
5% to 25% in internal rate of return (Figure 3).12 As a point of reference, the S&P 500 index (an

9 Ludovic Phalippou, An Inconvenient Fact: Private Equity Returns and the Billionaire Factory, June 20, 2020,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820.
10 Robert S. Harris, Tim Jenkinson, and Steven Kaplan, Private Equity Performance: What Do We Know?, February
2021, https://www.nber.org/system/files/working_papers/w17874/w17874.pdf.
11 For examples of key arguments and rebuttals, see Michael Cembalest, Food Fight: An Update on Private Equity
Performance vs Public Equity Markets, June 28, 2021, https://privatebank.jpmorgan.com/content/dam/jpm-wm-aem/
global/pb/en/insights/eye-on-the-market/private-equity-food-fight.pdf.
12 Cembalest, Food Fight.
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index including 500 large U.S. publicly traded companies) has an annualized average return of
around 11% between its inception in 1957 and 2021.13
Figure 3. U.S. Private Equity Buyout Performance

Source: J. P. Morgan Asset Management, Steve Kaplan (Chicago Booth), and Burgiss.
Notes: MOIC = multiples of invested capital; IRR = internal rate of return. MOIC measures cash in versus cash
out, while IRR is a time-weighted measure of return.
Risk Measures
PE’s volatility of returns relative to public equity have also been subject to debate. Some data
show that the PE index has lower volatility than do public equity benchmarks. Other observers
argue that that measurement is the result of PE portfolio companies typically being valued
quarterly instead of daily like public equity markets. In addition, they believe certain valuation
measures could have “smoothed” the pricing, because companies that are not publicly traded lack
trading-based pricing, and the valuations are largely dependent on external appraisals.14 As such,
some believe that if PE firms valued their portfolio companies more frequently using different
valuation methods, their volatility could be higher.
PE investors often expect higher returns to compensate for the funds’ inherent risk. For example,
PE funds could invest in high-risk assets with limited information disclosure, including small
private companies and distressed companies that face high possibilities of default. PE fund
investors also face higher liquidity risk than public equity holders do and thus expect a liquidity
premium. Liquidity refers to how easy it is to buy and sell securities without affecting the price.
Public funds (e.g., mutual funds and exchange-traded funds) are considered liquid for investors
because of their daily redemption or exchange trading features, whereas PE funds are considered
illiquid because their holding periods could be as long as five to 10 years.15 Thus, PE investors
may not be able to sell their investments when sudden cash needs arise.

13 S&P Dow Jones Indices, S&P 500, https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview; and J. B.
Maverick, “What Is the Average Annual Return for the S&P 500?,” Investopedia, January 13, 2022,
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#.
14 Nicolas Rabener, “Private Equity: The Emperor Has No Clothes,” CFA Institute, December 3, 2018,
https://blogs.cfainstitute.org/investor/2018/12/03/private-equity-the-emperor-has-no-clothes.
15 There are also publicly traded PE funds. Such funds could gain liquidity by trading on national securities exchanges
after going through an additional public securities offerings regulatory compliance process.
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Regulatory Framework
Because PE funds are private, as previously noted, they are exempt from certain laws and
regulations that generally govern public funds. For example, PE funds are exempt from the
Investment Company Act of 1940 (P.L. 76-768) and are not required to register with the SEC and
provide related public disclosure and other compliance at the fund level.16 Much of the regulation
of PE applies to PE advisers. Section 202(a)(11) of the Investment Advisers Act of 1940 (IAA;
P.L. 76-768) defines adviser as any person or firm that, for compensation, is engaged in providing
advice to others or issuing reports or analyses regarding securities. PE fund managers, for
example, would usually qualify as advisers.
PE fund advisers could be subject to SEC or state registration and oversight if they have more
than $150 million in assets under management. The IAA provisions and related agency rules
specify many PE adviser obligations.17
Reporting Requirements
PE advisers use Form ADV to register with the SEC and state securities authorities. Form ADV
disclosures are publicly available and include information about the adviser’s business,
ownership, employees, affiliations, fees, potential conflicts of interest, and past disciplinary
events, among other information.18 A PE adviser may also be required to submit Form PF with
information about the fund’s beneficial ownership, size, leverage, industry concentration, and
other matters, though this information is not subject to public disclosure.19
Other Operational Compliance
SEC-registered PE investment advisers face other compliance requirements, including, for
example: (1) fiduciary requirements that obligate advisers to act in the best interests of their
clients, (2) a code of ethics that governs insider trading, (3) requirements to seek best price and
execution for their clients’ securities transactions, (4) potential SEC examinations, (5) custody of
client assets, and (6) requirements governing how advisers can advertise their services or pay
others to solicit new clients.20
Operating and Financing Structure
PE firms are typically managed through partnerships that consist of two types of partners. The
general partners are responsible for the operations of the fund, including raising capital and
setting up the fund. The limited partners are capital investors who are not involved with the daily
operations. While general partners typically have unlimited personal liability of the partnership’s

16 See Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940.
17 Staff of the SEC’s Division of Investment Management and Office of Compliance Inspections and Examinations,
Information for Newly-Registered Investment Advisers, November 23, 2010, https://www.sec.gov/divisions/investment/
advoverview.htm.
18 SEC, Form ADV, https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv.
19 SEC, Form PF, https://www.sec.gov/files/formpf.pdf.
20 SEC, Division of Investment Management, Staff of the Investment Adviser Regulation Office, Regulation of
Investment Advisers by the U.S. Securities and Exchange Commission, March 2013, https://www.sec.gov/about/offices/
oia/oia_investman/rplaze-042012.pdf.
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debts, limited partners’ liabilities are limited to the money they put in. One PE firm may create
multiple PE funds, and the general partners could hire professional fund managers to manage the
investments.21
Private Equity versus Other Funds
PE investments differ from other public and private funds through their types of investments,
levels of operational control, and restricted investor access.22 PE funds typically place long-term
investments in mature companies, whereas venture capital invests in early stage companies. PE
funds often maintain some level of operational control over the portfolio companies, which is not
the general practice at public funds such as mutual funds and exchange-traded funds.
Leveraged Buyout
PE investments normally focus on obtaining a controlling stake in private companies, purchasing
business units from public or private companies, or taking entire public companies private. To
finance such transactions, the PE firms often reconfigure their portfolio companies’ capital
structure to expand on the debt offerings and use the proceeds from new debt to reduce the
amount of money the PE firms themselves would have to put in. This use of debt, or “leverage,”
for asset purchases is referred to as a leveraged buyout (LBO). Because LBOs are a common
practice for PE, some industry observers use the terms PE fund and LBO fund interchangeably.23
Dividend Recapitalization
Dividend recapitalization refers to the issuance of new debt to pay shareholders (e.g., PE equity
investors). PE firms could deploy dividend recapitalization as a strategy to reconfigure their
portfolio companies’ financing structure and debt and equity composition. As Figure 4 illustrates,
this practice increases the debt for portfolio companies but transfers the cash proceeds to equity
investors.

21 Sean Gill, CFA Institute Investment Foundations, Third Edition, Chapter 12 Alternative Investments,
https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/12-alternative-
investments.ashx.
22 SEC, Private Equity Funds, https://www.investor.gov/introduction-investing/investing-basics/investment-products/
private-investment-funds/private-equity.
23 Steven Kaplan and Per Strömberg, Leveraged Buyouts and Private Equity, July 2008, https://www.nber.org/system/
files/working_papers/w14207/w14207.pdf.
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Figure 4. Dividend Recapitalization

Source: CRS.
Value Creation Process
PE funds’ active involvement in the operations of portfolio companies they acquire and their
financing methods are undertaken with the goal of making their investors’ stakes in those
companies more valuable. This section explains PE value creation from mathematical calculation
and attribution analysis perspectives. The “Calculation Methods” section provides simplified
ways to conceptualize value drivers. The “Attribution Analysis” section provides examples of
specific actions that lead to higher valuations.
Calculation Methods
PE’s financial value creation is generally measured by the difference in a portfolio company’s
valuation between the entry and exit points of the PE investments and adjusted for changes in net
debt.24 Among many different securities valuation methods that could calculate a company’s
worth, the industry typically applies multiples analysis (in conjunction with other methods) that
estimates company values using the company’s earnings before interest, taxes, depreciation, and
amortization (EBITDA), which represents a firm’s financial performance and earnings capacity.
In a simplified analysis, the investors would calculate a “multiple” using the transaction history of
comparable companies, including how much these companies were sold at how many times their
EBITDA.25 The estimated company value would equal EBITDA times the multiple.

24 Net debt is total debt minus cash and cash equivalents. For simplicity, this section selectively explains factors with
more policy relevance, thus not discussing all factors in depth.
25 For more on multiples analysis, see Corporate Finance Institute, Multiples Analysis,
https://corporatefinanceinstitute.com/resources/knowledge/valuation/multiples-analysis; and CFA Institute, Market-
Based Valuation: Price and Enterprise Value Multiples, https://www.cfainstitute.org/en/membership/professional-
development/refresher-readings/market-based-valuation-price-enterprise-value-multiples.
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Portfolio company value = EBITDA x Multiple (M)
For example, if a company’s EBITDA is $12 million, at a 10 times multiple (which should be
comparable to similar companies’ previous sales prices and valuations), $120 million is the
portfolio company’s estimated worth.26 This formula shows that increasing EBITDA or the
“multiple” would increase company valuation.
Attribution Analysis
Attribution analysis is an evaluation tool that identifies and explains drivers of a fund’s
performance. Figure 5 illustrates the ways PE could expand EBITDA and multiples. PE’s
standard methods for expanding EBITDA include assisting portfolio companies to generate
revenue growth or profit margin expansion. Improving a company’s operations through cost
savings and operational efficiencies, for example, could realize profit margin expansion. Offering
new products and distributing products to new geographic locations, for example, could boost
sales and realize revenue growth.
Figure 5. Examples of PE Value Creation Attribution and Policy Issues

Source: CRS.
Notes: PE = private equity; EBITDA = earnings before interest, taxes, depreciation, and amortization; Multiple =
enterprise value calculation multiples. The chart does not provide an inclusive list of all examples. The examples
may not be mutually exclusive in relation to value creation factors.
Methods to expand multiples include modifying a company’s business strategy to increase the
likelihood of future growth. This could mean developing higher quality assets (such as those with
better cash flow) in market segments with more growth potential. Adjusting the cost of capital for
financing the company could also expand multiples. Sometimes external market conditions that
are usually outside the control of the PE fund (e.g., macroeconomic conditions) could also expand
or decrease multiples and affect company valuation.
Figure 5 shows how PE creates value for its investors (though not necessarily for, and in some
cases at the expense of, other stakeholders) through methods that may elicit a variety of policy
concerns:

26 Of course, investors may apply several valuation methods concurrently in actual PE transactions, and the factors
influencing assumptions and adjustments could be much more nuanced.
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 Capital restructuring—for example, changing the ratio and types of a company’s debt
and equity in an effort to manage the total cost of capital or for other purposes,
drawing down capital not yet invested, or negotiating with lenders to gain more
flexibility for loans;
 Operational changes—for example, increasing productivity through cutting jobs,
selling non-core assets, or making adjustments to the company’s business strategy;
 Incentive allocation—for example, using new performance-based incentive structures
and equity ownership retention bonuses for managing the company.
PE investors complete their investment lifecycle after cashing out from the portfolio company
asset holdings. The exit strategies—for example, finding the opportunistic timing to sell the
portfolio companies through mergers and acquisitions, initial public offerings, secondary
offerings to other PE firms, or partial exit through dividend recapitalization, among other
methods—are also important factors for creating value for investors.
Policy Issues
This section discusses PE-related policy issues from the perspectives of benefits, challenges, and
industry-specific debates.
Potential Benefits
Many research papers suggest that PE plays a role in enhancing competition, enabling capital
formation, assisting distressed company resolution, and transforming financially underperforming
companies. The PE industry has also taken on increased importance because of a significant
increase in the size of the private securities and private funds markets.27 Because PE funds
purchase large volumes of private securities, this shift has led the industry to occupy an
increasing role in U.S. capital markets. (The reasons for the changing public versus private
markets landscape is another policy debate beyond the scope of this report.)28
 Capital formation. PE channels money from investors to companies in need, thus
facilitating capital flow for economic activities.
 Performance and productivity gain. Some argue that PE’s active ownership at
portfolio companies could add value by increasing operational efficiency, including
creating worker productivity gains and other performance enhancements. One
research study showed that labor productivity increased by 8% over two years at PE

27 Companies turn to capital markets to raise funding from investors. This process is referred to as a securities offering.
Similar to public and private funds, public securities offerings are open to a wide range of investors and must meet
comprehensive registration requirements imposed by the SEC, whereas private securities offerings are exempt from
certain SEC registration requirements and face investor access restrictions. For more on public and private securities
offerings and funds, see CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by Eva
Su; and CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su.
28 Two points of view are presented by Steven Davidoff and Paul Rose, “The Disappearing Small IPO and the
Lifecycle of the Small Firm,” July 1, 2014, https://ssrn.com/abstract=2400488; and Michael Ewens and Joan Farre-
Mensa, “The Deregulation of the Private Equity Markets and the Decline in IPOs,” February 7, 2020, https://ssrn.com/
abstract=3017610. For more background, see CRS Report R45221, Capital Markets, Securities Offerings, and Related
Policy Issues, by Eva Su.
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portfolio companies after the buyout.29 Other research has also shown enhanced
performance and operating gains.30
 Distressed company resolution. PE tends to place investments in underperforming
companies. Some research states that certain PE’s acquisition of underperforming
businesses positively affected the local economy and helped to stabilize the financial
system during crisis.31 Other research states that PE-backed companies restructure
more quickly and that PE involvements could help avoid defaults or resolve financial
distress in a manner that better preserves firm value when defaults do occur.32
 Enhancements to competition. Some research states that PE transactions have a
positive spillover effect for competing firms in the same industry.33
Example: Hilton Hotels
As discussed in the “investment returns” section of this report, the PE industry typically generates
positive returns. As such, operational failures and investment losses may not represent the
industry norm. One of the most well-known PE “success stories” is Blackstone’s investment in
Hilton Hotels. Blackstone took Hilton Hotels private in 2007 and made it public again in 2013,
booking a gain of $10 billion. In Hilton Hotel’s 2013 initial public offering SEC filings, the hotel
disclosed that it employed 147,000 workers and increased the number of open rooms by 34%, or
170,000 rooms, between 2007 and 2013, which represented the highest growth rate of any major
lodging company for the period.34 As a point of reference, the number of workers Hilton Hotels
employed before the take-private transaction was 105,000 workers as of December 31, 2006.35
Potential Challenges and Concerns
The PE industry also faces mounting criticisms and challenges.36 PE practices have drawn
criticism for a number of reasons. Some challenges are related to the value creation process for
PE investors, while other challenges are linked to broad financial stability concerns.
 From a capital restructuring perspective. Some observers view the LBO process
as a way to extract wealth from portfolio companies while transferring the risk from
equity investors to debt investors. Other observers view excessive leverage (e.g., debt

29 Steven J. Davis et al., The Economic Effects of Private Equity Buyouts, October 7, 2019, https://www.hbs.edu/ris/
Publication%20Files/20-046_ceb00b98-e62a-45db-8d5f-9793ffd0226e.pdf.
30 Shourun Guo et al., “Do Buyouts (Still) Create Value?,” Journal of Finance, vol. 66, no. 2 (April 2011),
https://www.jstor.org/stable/29789787.
31 Emily Ross, Song Ma, and Manju Puri, Private Equity and Financial Stability: Evidence from Failed Bank
Resolution in the Crisis, April 17, 2021, https://ssrn.com/abstract=3828789.
32 Edith Hotchkiss, Per Stromberg, and David Smith, Private Equity and the Resolution of Financial Distress, July 7,
2021, https://ssrn.com/abstract=1787446.
33 Serdar Aldatmaz and Gregory Brown, Private Equity in the Global Economy: Evidence on Industry Spillovers, July
29, 2019, https://ssrn.com/abstract=2189707.
34 SEC, Hilton Worldwide Holdings Inc. Form S-1, September 12, 2013, https://www.sec.gov/Archives/edgar/data/
1585689/000119312513364703/d593452ds1.htm.
35 SEC, Form 10-K Hilton Hotels Corp, February 28, 2007, https://sec.report/Document/0001104659-07-014553.
36 For example, Sen. Elizabeth Warren, “Warren, Baldwin, Brown, Pocan, Jayapal, Colleagues Reintroduce Bold
Legislation to Fundamentally Reform the Private Equity Industry,” press release, October 20, 2021,
https://www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-pocan-jayapal-colleagues-reintroduce-
bold-legislation-to-fundamentally-reform-the-private-equity-industry.
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borrowing) as a financial stability concern because it could reduce the portfolio
companies’ ability to absorb risks during adverse market conditions.
 From an operational changes perspective. Some observers view cost savings
through job cuts as a way to enrich the investors while bringing harm to affected
individuals and communities.37 Although many aspects of operational improvements
through job cuts are intended to improve financial profit and operational efficiency,
concerns exist regarding employment,38 social welfare, and the importance of
stakeholder capitalism (as oppose to shareholder capitalism).39
 From an incentive allocation perspective. While some employees face job cuts and
pay reductions following buyouts, portfolio company managers may receive retention
bonuses and performance-based incentives as a result of productivity increases.40 In
addition, some observers (including the SEC’s Office of Compliance Inspections and
Examinations) view certain investment fund manager incentives and fees as
potentially excessive, non-transparent, and rife with conflict of interest concerns.41
Furthermore, some PE fund managers may have provided misleading disclosures to
investors in order to gain incentives and fees.42
 From an exit strategy perspective. Some observers are concerned about certain exit
strategies, such as dividend recapitalization, which allows portfolio companies to
borrow more debt to pay dividends to equity investors.43 Some observers view
dividend recapitalization as a tool to help PE funds book short-term profits without
making substantive improvements for the portfolio companies.44 While the proceeds
from dividend recapitalization could provide an early partial exit for PE investors, it
could increase the risk and debt burden at the portfolio companies and may harm the
companies’ ability to borrow new money for operations or growth.45
 From a financial stability perspective. In light of the PE industry’s growing size,
importance, and complexity, some observers have voiced financial stability concerns

37 U.S. Congress, House Committee on Financial Services, America for Sale? An Examination of the Practices of
Private Funds, hearing, 116th Cong., 1st sess., November 19, 2019, https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=404650.
38 Davis et al., The Economic Effects of Private Equity Buyouts.
39 Stakeholder capitalism versus shareholder capitalism is an area of intense policy debate. For more on stakeholder
capitalism, see McKinsey and Company, The Case for Stakeholder Capitalism, November 12, 2020,
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-stakeholder-
capitalism.
40 Phillip Leslie and Paul Oyer, Managerial Incentives and Value Creation: Evidence from Private Equity, National
Bureau of Economic Research, Working Paper no. 14331, September 2008, https://www.nber.org/papers/w14331.
41 SEC Risk Alert, Observations from Examinations of Investment Advisers Managing Private Funds, June 23, 2020,
https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf.
42 SEC Risk Alert, Observations from Examinations of Private Fund Advisers, January 27, 2022, https://www.sec.gov/
files/private-fund-risk-alert-pt-2.pdf.
43 See “Dividend Recapitalization” section of this report for more background.
44 Eileen O’Grady, Dividend Recapitalizations in Health Care, October 2020, https://pestakeholder.org/wp-content/
uploads/2020/10/PESP-HC-dividends-10-2020.pdf.
45 Matthew Goldstein, “Private Equity Firms Are Piling On Debt to Pay Dividends,” New York Times, February 19,
2021, https://www.nytimes.com/2021/02/19/business/private-equity-dividend-loans.html. Other observers argue that
dividend recapitalization is often conducted at the request of PE limited partners, such as pension funds, to fulfill these
investors’ scheduled pension obligations to retirees. American Investment Council, Private Investment Explained:
Dividend Recapitalization, February 19, 2021, https://www.investmentcouncil.org/private-investment-explained-
dividend-recapitalization.
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regarding risk monitoring and information transparency. The “Form PF Reform”
section of the report discusses these financial stability concerns (and the SEC
proposed regulatory changes to address them) in more detail.
Example: Toys“R”Us
Toys“R”Us is one example that appears to capture multiple categories of policy concerns listed
above. PE companies Bain and KKR and real estate investment trust Vornado acquired
Toys“R”Us in 2005 through an LBO. The firm’s valuation at the time was approximately $7.5
billion with $1 billion in debt—a capital structure of 87% equity and 13% debt.46 The consortium
purchased the firm for $6.6 billion—paid for using $1.3 billion in equity from the investors and
the rest in new debt. Combined with the existing debt, Toys“R”Us’s capital structure post-
acquisition reached 17% in equity and 83% in debt. To service the debt, Toys“R”Us had to
contribute the vast majority (97%) of its operating profit, which some observers believe
accelerated the firm’s underperformance and eventual bankruptcy.47 When Toys“R”Us filed for
Chapter 11 bankruptcy in 2018, it owed creditors $5.3 billion in debt. During the liquidation,
around 33,000 employees lost their jobs and were not paid the $75 million they claimed the firm
owed, because other more senior creditors were paid before them during the bankruptcy
process.48 On the PE investor side, Bain, KKR, and Vornado lost $1.3 billion of their equity
investments, but the loss was partially offset by $470 million in fees and other payments they
previously collected.49
Many policymakers raised concerns about the fairness of the outcome for Toys“R”Us’s 33,000
employees who lost their jobs and the affected communities, among other issues.50 Critics and
advocates of PE reportedly generally agree that “you don’t want to stand in the way of economic
innovation, but you would hope that people who get run over are helped.”51
Example: Trident USA
Trident USA, a provider of mobile diagnostic equipment to nursing homes and elder care
facilities, reportedly conducted multiple rounds of dividend recapitalization (see the “Dividend
Recapitalization” section of the report for more background) while under investigation for illegal
kickback schemes. The company filed for bankruptcy in 2019 after paying out $380 million to
several PE firms.52

46 Testimony of Eileen Appelbaum, in the U.S. Congress, House Committee on Financial Services, America for Sale?
An Examination of the Practices of Private Funds, hearings, 116th Cong., 1st sess., November 19, 2019,
https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-appelbaume-20191119.pdf.
47 Tara Lachapelle, “Lessons Learned from the Downfall of Toys ‘R’ Us,” Bloomberg, March 9, 2018,
https://www.bloomberg.com/news/articles/2018-03-09/toys-r-us-downfall-is-ominous-reminder-about-debt-laden-
deals.
48 Steven Church, “Toys ‘R’ Us Bankruptcy Plan Ties Payouts to Manager Lawsuits,” Bloomberg, November 13, 2018,
https://www.bloomberg.com/news/articles/2018-11-13/toys-r-us-bankruptcy-plan-ties-payouts-to-manager-lawsuits.
49 David Carey, “Bain, KKR, Vornado Suffer Wipeout in Toys ‘R’ Us Bankruptcy,” Bloomberg, September 19, 2017,
https://www.bloomberg.com/news/articles/2017-09-19/bain-kkr-vornado-suffer-wipeout-in-toys-r-us-bankruptcy.
50 House Financial Services Committee, America for Sale?
51 Katia Dmitrieva, “Everything Is Private Equity Now,” Bloomberg, October 3, 2019, https://www.bloomberg.com/
news/features/2019-10-03/how-private-equity-works-and-took-over-everything.
52 Eileen O’Grady, Dividend Recapitalizations in Health Care, Private Equity Stakeholder Project, October 2020,
https://pestakeholder.org/wp-content/uploads/2020/10/PESP-HC-dividends-10-2020.pdf.
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Industry-Specific Debates
Some observers believe that PE’s business model, which seeks to maximize profits, could appear
incompatible with certain public-service-oriented industries, such as health care and education,
which should, PE critics argue, prioritize quality of care, societal impact, or long-term well-being.
But PE firms are increasingly involved in some of these industry sectors. For example, one
research paper estimates that the PE transaction value in the health care sector had reached $120
billion in 2019 from $42 billion in 2010.53 Some observers argue that the PE involvement could
put the health care system at risk, citing studies that show PE firms have adversely affected health
outcomes and prices.54
Some industry practitioners believe that PE could help improve systems that involve the public
good. For example, one report from a consulting firm argues that private funding fills a void
where public education systems are overburdened and lack the resources to deal with rapid
increases in demand. This consulting firm states that PE’s societal impact challenges and invites
policymakers to “adopt transparent, robust and consistent regulatory frameworks [to] track and
report relevant data; and provide incentives to encourage private sector participation to address
unmet needs.”55
SEC Proposed Rules
As the primary regulator for the PE industry, the SEC could implement certain regulatory changes
at the agency level without additional congressional legislative mandates. The SEC published two
proposed rules in the first quarter of 2022 to reform the PE industry through regulatory changes
aimed at private fund advisers and Form PF disclosure processes. These proposed amendments
would generally affect all private funds, including PE. Many observers predict that these agency
actions would transform PE regulatory philosophy and practice.
The SEC’s private fund reform focuses more on investor protection issues, and the Form PF
reform emphasizes systemic risk mitigation and financial stability concerns.
Private Fund Reform
On February 9, 2022, the SEC issued a proposed rule pursuant to its authorities under the
Investment Advisers Act of 1940 (IAA; P.L. 76-768).56 If the proposal goes into effect, PE fund
managers would start providing quarterly statements on fund performance and fees to their
investors for the first time. The funds would also have to undergo annual audits and face some
new prohibitions, among other requirements. In proposing the amendments, the SEC emphasized

53 Richard Scheffler, Laura Alexander, and James Godwin, Soaring Private Equity Investment in the Healthcare
Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk, American Antitrust Institute and
Petris Center, University of California, Berkeley, May 18, 2021, https://publichealth.berkeley.edu/wp-content/uploads/
2021/05/Private-Equity-I-Healthcare-Report-FINAL.pdf.
54 Scheffler, Alexander, and Godwin, Soaring Private Equity Investment in the Healthcare Sector.
55 Ashwin Assomull, Maryanna Abdo, and Roisin Pelley, Driving Grades, Driving Growth: How Private Capital in
Education Is Increasing Access, Inspiring Innovation and Improving Outcomes, https://cdn.ey.com/parthenon/pdf/
perspectives/Parthenon-EY_WISE_Research_Report.pdf.
56 SEC, “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews,” proposed
rule, https://www.sec.gov/rules/proposed/2022/ia-5955.pdf.
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the changes in size and importance of the private fund markets and aimed to enhance the related
regulation for “increasing transparency, competition, and efficiency” in private funds markets.57
Traditional Regulatory Philosophy
Private funds traditionally face less regulation and disclosure than public funds do. The SEC
follows a disclosure-based regulatory philosophy that is consistent with Supreme Court Justice
Louis Brandeis’s famous quote that “sunlight is said to be the best of disinfectants; electric light
the most efficient policeman.”58 In practice, for public securities offerings and public funds,
transparency through disclosure seeks to inform investors and policymakers and enables market
mechanisms to price risk and deter fraud. The expectations for market participants are that if the
securities issuers or funds elect to opt into public markets for fundraising, they would generally
have to provide extensive disclosure to all investors.
The funds could also elect to be private, meaning they could provide less disclosure than public
funds do but confine their activities to a smaller investor pool that consists mainly of more
sophisticated institutional investors and individuals with higher income and net worth (e.g., PE
investors in Figure 2). These sophisticated investors are perceived as better able to fend for
themselves through (1) their existing financial cushions to absorb potential investment losses and
(2) their professional knowledge and expertise enabling them to comprehend and manage risks
absent the standardized disclosure.
By increasing the disclosure and compliance requirements at private securities markets, which
some observers referred to as “spreading sunshine” in PE (following the metaphor created by
Brandeis),59 some argue the SEC would be blurring the line between public and private funds and
markets from a regulatory perspective.60
Proposed Amendments to the IAA
The SEC proposed changes to the IAA that aim to enhance protection for private fund investors,
including PE investors. The proposal would impose new requirements on SEC-registered private
fund advisers and other advisers. The following are the new proposed rules and other
amendments under the IAA:61
 Quarterly Statement Rule. The proposal would require SEC-registered PE fund
advisers to provide quarterly statements on the funds’ performance, fees, and
expenses to their investors. For illiquid funds such as PE funds, the proposed rule
would require reporting of IRR and multiples of invested capital adhering to specific
definitions for standardized performance measures. See the “Industry Size, Investors,
and Performance” section for more background on the PE performance measures.

57 SEC, “SEC Proposes to Enhance Private Fund Investor Protection,” press release, February 9, 2022,
https://www.sec.gov/news/press-release/2022-19.
58 Louis Brandeis, “What Publicity Can Do,” Chapter 5 in Other People’s Money (1932). First published in Harper’s
Weekly, December 20, 1913.
59 Andrew Bowden, SEC Director for Office of Compliance Inspections and Examinations, Spreading Sunshine in
Private Equity, May 6, 2014, https://www.sec.gov/news/speech/2014—spch05062014ab.html.
60 Hannah Zhang, “The SEC Thinks the Lack of Transparency in Private Markets Is a Risk to Investors. The
Commission Wants That to Change,” Institutional Investor, November 8, 2021, https://www.institutionalinvestor.com/
article/b1vcmt40y4rq4b/The-SEC-Thinks-the-Lack-of-Transparency-in-Private-Markets-Is-a-Risk-to-Investors-The-
Commission-Wants-That-to-Change.
61 SEC, Private Fund Proposed Reforms Fact Sheet, https://www.sec.gov/files/ia-5955-fact-sheet.pdf; SEC, “Private
Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews.”.
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 Private Fund Audit Rule. The proposal would require financial statement audits to
be distributed to investors annually and at a fund’s liquidation.
 Adviser-Led Secondaries Rule. The proposal would require the PE fund advisers to
obtain a fairness opinion at an adviser-led secondary transaction. The adviser-led
secondary transaction refers to, for example, the buying opportunities for existing
fund investors of other assets being advised by the same PE adviser. A “fairness
opinion” is a valuation analysis that opines on whether the terms and prices of the
transactions are fair. The proposal would also require the advisers to provide to
investors a written summary of business relationships that could lead to potential
conflict of interest concerns between the fairness opinion providers and the advisers.
 Prohibited Activities Rule. The proposal would prohibit all private fund advisers
(including unregistered advisers) from certain activities that would harm public
interest and investor protection, such as wrongfully charging fees and expenses for
unperformed services or assigning fees on a non-pro-rata basis, among other things.
 Preferential Treatment Rule. The proposal would prohibit all private fund advisers
from providing preferential treatment to investors regarding redemption terms or
information about fund holdings. It would also prohibit other types of preferential
treatment unless such activities are disclosed to current and prospective investors.
 Books and Records Rule amendments. The proposal would amend the Books and
Records Rule under the IAA to require advisers to retain records in relation to the
new provisions in the proposed rule.
 Compliance Rule amendments. The proposal would amend the Compliance Rule
under the IAA to require advisers to document their annual review of compliance
policies and procedures in writing.
Policy Debates About Private Fund Reform
This section explains the SEC’s private fund reform policy intention and the views from
proponents and opponents of the proposal.
The SEC’s Policy Intention and Proponents’ Views
SEC Chair Gary Gensler explained the proposal’s policy intention, stating that “private fund
advisers, through the funds they manage, touch so much of our economy. Thus, it’s worth asking
whether we can promote more efficiency, competition, and transparency in this field.” Gensler
said the proposal “would help investors in private funds on the one hand, and companies raising
capital from these funds on the other.”62 Regarding specific provisions, the SEC concluded that
the information disclosure would allow private fund investors to better assess, monitor, and
compare their investments. The audits, fairness opinions, and prohibitions could provide checks
and balances to protect private fund investors against fraud, conflict of interest, or
misappropriations of assets and fees. The additional compliance amendments to the existing rules
would increase the SEC’s ability to monitor the advisers’ compliance with the proposed rules.63
Some consultants and investor groups support the SEC’s plan to increase fee transparency. These
proponents argue that the reform could help private fund managers, including pension funds and

62 SEC, “SEC Proposes to Enhance Private Fund Investor Protection.”
63 SEC, “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews.”
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others, to track private fund performance and negotiate costs. Some proponents argue that the
regulatory actions to bring PE regulation more in line with public markets are overdue. One
consultant stated that “the SEC is trying to play catch-up. They want more information as private
equity gets more pervasive as an investment option.”64 Regarding other actions to address fees,
expenses, and conflict of interest concerns, the proponents argue that the regulatory actions
provide answers to some of the previously identified industry misconduct, including numerous
issues addressed in the SEC’s risk alerts.65
Opponents’ Views
Some observers view the proposal as a significant departure from the traditional private fund
regulation paradigm. As previously discussed, the traditional regulatory philosophy suggests that
more sophisticated investors are adequately protected with a less intensive disclosure framework.
As such, the SEC investor protection regulation has been more focused on retail investors, which
are perceived to be less sophisticated. One of the SEC’s commissioners, who cast the dissenting
vote, stated that the proposal “embodies a belief that many sophisticated institutions and high-net-
worth individuals are not competent or assertive enough to obtain and analyze the information
they need to make good investment decisions or to structure appropriately their relationships with
private funds.”66 She stated that the SEC should allocate resources toward retail investor
protection instead of private fund investor protection. Some private fund industry groups state
that “we are concerned that these new regulations are unnecessary and will not strengthen pension
returns or help companies innovate and compete in a global marketplace.”67 Some argue that the
SEC’s proposed rules would “harm the most sophisticated investors.”68
Other observers explain that the business terms between PE investors and PE funds are often
commercially negotiated.69 Some state that private fund investors already negotiate and receive
information relevant to investment decisionmaking absent the SEC’s proposed mandates.
Because the existing fiduciary requirements already obligate the PE advisers and some of their
institutional clients to act in the best interest of their clients, some observers argue that certain
provisions in the proposal may not generate meaningful additional impact.70 In addition, some PE
fund lawyers anticipate litigation challenges at the SEC. They question the SEC’s authority to
impose prohibitions and whether the SEC’s economic analysis provided sufficient justifications

64 Chris Flood and Antoine Gara, “Investment Industry Welcomes SEC Efforts to Reform Private Equity Fees,”
Financial Times, February 17, 2022, https://www.ft.com/content/ec661f96-4c71-4361-a823-00bb69ba0fc0.
65 For example, SEC, Division of Examinations, Risk Alert: Observations from Examinations of Private Fund Advisers,
January 27, 2022, https://www.sec.gov/files/private-fund-risk-alert-pt-2.pdf.
66 SEC Commissioner Hester Peirce, Statement on Proposed Private Fund Advisers; Documentation of Investment
Adviser Compliance Reviews Rulemaking, February 9, 2022, https://www.sec.gov/news/statement/peirce-statement-
proposed-private-fund-advisers-020922.
67 Paul Kiernan and Sebastian Pellejero, “SEC Proposes Broad Disclosure Rules for Private Investment Funds,” Wall
Street Journal, February 9, 2022, https://www.wsj.com/articles/sec-to-propose-broad-disclosure-rules-for-private-
investment-funds-11644418801.
68 Kiernan and Pellejero, “SEC Proposes Broad Disclosure Rules for Private Investment Funds.”
69 Robin Painter et al., “SEC Proposes Advisers Act Reforms Focusing on Private Fund Investor Protections,” National
Law Review, February 16, 2022, https://www.natlawreview.com/article/sec-proposes-advisers-act-reforms-focusing-
private-fund-investor-protections.
70 SEC-registered investment advisers are fiduciaries, meaning they have a legal obligation to act in the best interest of
their clients. For more on fiduciary requirements, see SEC, Information for Newly-Registered Investment Advisers,
November 23, 2010, https://www.sec.gov/divisions/investment/advoverview.htm.
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or rested solely “on generalized assumptions that the rules will simply enhance market
efficiency.”71
Form PF Reform
One other important action the SEC took to initiate reform in the PE market is its proposed
amendments to Form PF.72 Form PF controls the content and process for collecting PE data. The
reporting includes information about the PE’s size, leverage, beneficial ownership, industry
concentration, and other matters.
Form PF generally applies to all private funds, including PE, hedge funds, venture capital, and
liquidity funds. Depending on the fund type, the required Form PF reporting fields could be
different. The information collected is not subject to public disclosure except for industry-wide
statistics, which are shared with the public at the aggregate level.73 The confidentiality of Form
PF reporting protects private funds’ sensitive proprietary information, which could adversely
affect the funds’ competitiveness when made public. This section describes the importance of
Form PF, the proposed changes, and their policy debates.
Why Is Form PF Important?
The creation of Form PF was part of the regulatory reforms following the 2007-2009 financial
crisis to address financial stability concerns. As previously discussed, unlike public securities and
public funds, private funds generally do not have the same level of information disclosure and
transparency.74 Form PF aims to introduce more visibility into a large capital market segment that
was otherwise viewed as non-transparent.
SEC Rule 204(b)-1 implemented Title IV Sections 404 and 406 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (P.L. 111-203) to create Form PF and require that SEC-
registered investment advisers with at least $150 million in private fund assets under management
file the form.75 The SEC started using Form PF to collect data from private funds in July 2012.76
The initial policy intention for Form PF was to provide empirical data that allow regulators to
evaluate the private fund activities’ systemic risk implications.77 As such, Form PF’s confidential
reporting is available primarily to the SEC and the Financial Stability Oversight Council.78

71 David Blass, Michael Osnato, and Michael Wolitzer, “SEC Continues March Towards More Intrusive Regulation of
Private Funds,” Harvard Law School Forum on Corporate Governance, March 1, 2022,
https://corpgov.law.harvard.edu/2022/03/01/sec-continues-march-towards-more-intrusive-regulation-of-private-funds.
72 SEC, “SEC Proposes Amendments to Enhance Private Fund Reporting,” press release, January 26, 2022,
https://www.sec.gov/news/press-release/2022-9.
73 SEC, Form PF, https://www.sec.gov/files/formpf.pdf.
74 For more on SEC disclosure, see CRS In Focus IF11256, SEC Securities Disclosure: Background and Policy Issues,
by Eva Su.
75 17 C.F.R. §275.204(b)-1.
76 Pursuant to amendments to the IAA that were enacted in 2010.
77 Commodity Futures Trading Commission and SEC, “Reporting by Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors on Form PF,” 76 Federal Register 71127, November 16,
2011.
78 The SEC makes Form PF data available to the Office of Financial Research and to the Federal Reserve Board,
subject to certain use agreements and confidentiality protections. Staff of the SEC, U.S. Securities and Exchange
Commission Annual Staff Report Relating to the Use of Form PF Data, December 3, 2021,
https://www.sec.gov/files/2021-pf-report-to-congress.pdf.
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Financial regulators have been using Form PF data to monitor market conditions and inform
policy decisions.
Proposed Amendments to Form PF
The private fund markets have grown in size and complexity since the adoption of Form PF. In
light of the industry’s growth and the role some private funds played in recent market
disruptions,79 the SEC proposed amendments to Form PF on January 26, 2022.80 The proposed
rule would increase the scope and timeliness of large PE adviser reporting.
 Lowering reporting threshold. Form PF subjects large private fund advisers to
additional reporting requirements. PE advisers with more than $2 billion in
regulatory assets under management are “large private equity advisers.”81 The
proposed rule would lower the threshold for large PE advisers to $1.5 billion, thus
increasing the number of eligible PE advisers for additional reporting.82
 Increasing reporting content. The proposed rule would amend Section 4 of Form
PF for large PE advisers to gather additional information on fund strategies, use of
leverage and portfolio company financings, controlled portfolio companies (CPCs)
and CPC borrowings, fund investments in different levels of a single portfolio
company’s capital structure, and portfolio company restructurings or
recapitalizations.83
 Raising reporting timeliness. Form PF currently requires advisers to file the form
quarterly or annually with some time lag. The proposal would require large PE
advisers to file reports within one business day of the reporting events. The proposed
rule identifies reporting events as those actions that could significantly harm
investors or pose systemic risk concerns. Examples of reporting events include the
execution of adviser-led secondary transactions, implementation of general partner or
limited partner claw-backs, removal of a fund’s general partner, termination of a
fund’s investment period, or termination of a fund.84
Policy Debates About Form PF Reform
The SEC’s proposed rule did not receive uniform acceptance. Because previous sections already
explained the proposal’s background and merits, this section discusses some of the contrary
views.
The SEC proposed the amendments to Form PF in a three-to-one vote. The SEC commissioner
who cast the dissenting vote explained that the proposal “represents a fundamental shift in Form
PF’s scope and purpose” away from the original policy intention of systemic risk monitoring.85

79 For example, the role that some hedge funds played during Treasury market disruptions. For more on Treasury
market disruptions, see CRS In Focus IF12012, Treasury Securities Market Disruptions and Policy Issues, by Eva Su.
80 SEC, “Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private
Equity Advisers and Large Liquidity Fund Advisers,” 87 Federal Register 9106, February 17, 2022.
81 SEC, Form PF, https://www.sec.gov/files/formpf.pdf.
82 87 Federal Register 9106, p. 9119.
83 87 Federal Register 9106, p. 9120.
84 87 Federal Register 9106, p. 9108.
85 SEC Commissioner Hester Peirce, Statement on Proposed Amendments to Form PF to Require Current Reporting
and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, January 26,
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She also argued that, instead of reducing the reporting threshold for large PE advisers, the SEC
should increase it to reduce filing costs for smaller private funds.
Some in the industry are concerned about data breaches that could compromise the funds’
confidential and proprietary information.86 Some industry practitioners also worry that the SEC
could use the additional Form PF data for investigations. They argue that “nothing gets investors
to run for the door faster than a government investigation. Those practical realities provide plenty
of motivation for funds to push back here.”87
The public comment period for the proposed rule is 30 days after the Federal Register publishes
the proposed rule. The length of the comment period also attracted policy attention. Some
observers requested the SEC to extend the comment period for its rulemaking process.88 They
argued that the relatively short comment period may not leave sufficient time for the industry to
research, analyze, and provide quality comments on substantive changes. SEC Chair Gensler
reportedly explained that it is important to “move to the next steps in the rulemaking process to
determine whether the SEC should re-propose, modify, or adopt the proposed rules based upon
the feedback.”89 The SEC has a fall 2021 regulatory agenda that consists of around 54 rules.90 The
comment period debate also exists for some other proposed rules. Some observers argue that the
short and overlapping comment periods may place cumulative effects on the industry’s capacities
to respond.91

Author Information

Eva Su

Analyst in Financial Economics

2022, https://www.sec.gov/news/statement/peirce-form-pf-20220122.
86 Benjamin Bain and Robert Schmidt, “Hedge Funds Face New SEC Disclosures as Gensler Cracks Down,”
Bloomberg, January 26, 2022, https://www.bloomberg.com/news/articles/2022-01-26/hedge-funds-face-new-sec-
disclosoures-as-gensler-cracks-down.
87 Katanga Johnson, “U.S. SEC to Ramp Up Hedge Fund, Private Equity Fund Scrutiny,” Reuters, January 26, 2022,
https://www.reuters.com/business/finance/us-sec-aims-gather-more-details-fund-strategies-use-leverage-among-other-
details-2022-01-26.
88 Rep. Patrick McHenry and Sen. Pat Toomey, letter to the SEC, January 10, 2022, https://republicans-
financialservices.house.gov/uploadedfiles/2022-01-10_pmc_toomey_letter-gensler_sec_comment_period.pdf.
89 Quoted text is a summary by Soyoung Ho, “Gensler Defends 30, 45-Day Comment Period for SEC Rulemaking
Proposals,” Reuters, January 24, 2022, https://tax.thomsonreuters.com/news/gensler-defends-30-45-day-comment-
period-for-sec-rulemaking-proposals.
90 SEC, Agency Rule List—Fall 2021, https://www.reginfo.gov/public/do/eAgendaMain?operation=
OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=
3235&csrf_token=
7CE97CC2D49C9B6B70868F7B2752E582C86F1945A4A46F34426C18AF1ABE101E611318F64B67159C3A36E75
56BD0FB872C8F.
91 Al Barbarino, “SEC Under Fire Over Shorter Rule Proposal Comment Periods,” Law360, March 9, 2022,
https://www.law360.com/banking/articles/1471291/sec-under-fire-over-shorter-rule-proposal-comment-periods.
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