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Educational Alpha: E Pluribus UnAUM

January 4, 2024

By William (Bill) J. Kelly, CAIA, CEO of the CAIA Association.

CAIA Association Signs ILPA Amicus Brief:
Asset Owners Supporting the Spirit of the SEC’s PFA Rule

With due deference to the Latin Scholars, I have borrowed and slightly modified a phrase that was approved via an Act of Congress in 1782 to adorn the Great Seal of the United States. Prior to my addition of the single letter A, it means “out of one, many.” It was about this same time (1774) that a Dutch merchant by the name of Adriaan Van Ketwich formed what many consider to be the very first mutual fund named Eendragt Maakt Magt (“Unity Creates Strength”). It seems that both nationalism and capitalism trace back centuries to common cultures where all are created equal but are stronger together.  

250 years later AUM remains a badge of success, and the Trillion Dollar club is the place to be. Blackstone crossed this threshold in 2023. While they were the first private markets firm to gain admittance, it will not be the last and there is no footnote to demark what is truly a graduated level of sophistication within that ‘unity creates strength’ $1T number. Absent confirmation, it would be fair to surmise that the ‘world’s wealthiest, most sophisticated, and experienced investors (think the Abu Dhabi Investment Authority and Yale University endowment)’ are clients, but so too are individual investors who collectively represent 25% of that total AUM.  

But those are accredited investors, right? Certainly, that would have to be the case for access to any private fund offering, but that prospect pool would include even my recently departed Dad; a 93-year-old depression-era baby who was a prodigious saver all of his life. His portfolio was not large, he was certainly not as savvy as ADIA, and his version of ‘the world’s largest law firms’, was a sole practitioner on a hardscrabble street corner somewhere in Yonkers, NY. 

No wonder the eclipse of $1T in the aforementioned case came with some realizations and forewarnings both inside and outside those clubby hallowed halls. Josh Lerner summed it up best when he said, “PE firms are now complex assemblages … meaning more scrutiny from investors and regulators.” Almost on queue, and seemingly within weeks of the first $1T PE Member being welcomed into the club, the SEC came forward with their Private Fund Advisor (PFA) Regulation that was finalized in August of 2023.  Not everyone was happy, but then again, more regulation is rarely met with celebration; it is, more so, a recognition that size and success beget more rules and greater responsibilities for all of the AUM. 

The SEC’s proposed regulation is always open for a comment period and a tour through those submissions can often be very telling and those writing with views on the PFA regs were no exception. Not a single comment letter (for or against) could be found coming directly from any of the largest global PE firms, although it is possible that various trade associations might be speaking on their behalf. On Regulation, written by Howard Marks now almost 15 years ago, perhaps sums up the sentiment of the quality manager who understands the duties and responsibilities of what it means to be a fiduciary amidst the “swing of the regulatory pendulum.” 

Equally telling were the more than two dozen comment letters coming from self-identified institutional investors including CalPERS, who would be on most anyone’s Who’s Who List of most sophisticated investors. Not a single one of those letters came out in opposition to the proposed rule, but constructive criticisms were expected and in play, and were largely confined to comments on the use of side-letters and other preferential treatment. The SEC seemed to have heard that message and generally solved for it via specific disclosure requirements in the final regulations. 

Also commenting during the open period were several pension consultants and LP associations such as SBAI and ILPA. In the case of ILPA, they have sought to further balance the deliberations amidst pending litigation with a recent Amici Curiae (Friend of the Court) filing. They are quite clear that the regulation as written is not perfect, but the move toward greater transparency and avoidance of conflicts are necessary and certainly within the remit of the SEC. CAIA Association has signed on as an indication that we too, along with all of our Members, ‘have an interest in the outcome of this case.’ I encourage all of you to check any self-interests at the door, educate yourself on all the facts, and be part of the discussion and solution that will foster the prosperity of our industry, for all participants. 

As I conclude, I want to go back to a final fun fact on E Pluribus Unum. There are 13 letters in that three-word string which by design, represent the 13 original US Colonies, the 13 stripes you will find on the American flag, and maybe now, more than ever, the 13 letters in our “Fiduciary Duty.”  

Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.  

About the Author:

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Bill Kelly, CAIA, has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014. Previously, Bill was the CEO of Boston Partners and one of seven founding partners of the predecessor firm, Boston Partners Asset Management which, prior to a majority interest being sold to Robeco Group in Rotterdam in 2002, was an employee-owned firm. Bill’s career in the institutional asset management space spans over 30 years where he gained extensive managerial experience through successive CFO, COO and CEO roles.

In addition to his current role, Bill is a tireless advocate for shareholder protection and investor education and is currently the Chairman and lead independent director for the Boston Partners Trust Company. He has previously served as an independent director and audit committee chair for ’40 Act Mutual Funds and other financial services firms. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. A member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators. Bill began his career as an accountant with PwC and is a designated Audit Committee Financial Expert in accordance with SEC rules.