An Investors First Agenda for the Biden Administration

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"As the professional body for the alternative investment industry, CAIA’s mission is to improve financial and societal outcomes through professional education, transparency, and thought leadership.  Our north star is to foster a more virtuous profession that serves the client and creates a fulfilling career for our Members."

A hearty congratulations to President-elect Biden and Vice President-Elect Harris.  

In your victory speech, you claimed that regardless of our voting preference, you would be a president for all Americans.  We appreciate the sentiment of much needed unity but are writing to implore your administration to place special emphasis on the individual investor. It’s time that the SEC and DOL are empowered and held accountable to strip off their pre-suppositions and party affiliations to elevate retirement security above all else.    

As such, we suggest the following three-pronged “Investors First” agenda:

Properly Trained Access to Alternative Beta

Constructing a portfolio that provides inflation protection, capital preservation, and income while weathering the gyrations of market cycles is foundational to building a retirement nest egg.  Providing all investors with a full buffet of asset classes, including alternative investments, can improve risk adjusted returns over the long term.  Further, with capital formation structurally shifting to the private markets and companies staying private longer, it is foolhardy to continue to pretend that public equity and debt alone are a fair proxy for the global economy.  Accordingly, increasingly large portions of capital markets regulated as “off limits” to hard working pension savers is neither politically viable or sensible.

But as we have argued before, the opacity and complexity of these strategies, coupled with alarmingly wide manager dispersion, require robust professional training and an ethical underpinning.  The current SEC has not gone far enough in prescribing requisite education of both investors and gatekeepers (advisors, plan sponsors, and wholesalers) to ensure they are equipped to evaluate the appropriateness of fit for themselves or their clients.  In this vein, we would strongly suggest the bar be raised to dedicated investment education with associated fiduciary duty obligations such as the CAIA or CFA charters.  

End the ESG Fiduciary War

ESG has never been about social engineering but rather about how values impact value. These risks may be longer-term but it is incontrovertible that many, such as climate change, present material threats.  The probability and magnitude of these uncertainties can be quantitatively estimated and will have substantial influence on companies’ predicted future cash flows, and the ability for the investment professional to deliver on investment outcomes.

The current DOL rightly argued that “only pecuniary factors that have a material effect on the return and risk of an investment” should be considered.  They are also correct in cracking down on rampant “greenwashing.”  But many interpreted their ruling as creating a false dichotomy between retirement security and ESG investing.  This contradictory guidance, potentially loaded with partisan worldviews and litigation underpinnings, should be clarified.

Further, we applaud the recent news and appointment of a cabinet level position for climate change; the time has come to give this existential challenge its proper station.  We strongly suggest you consider surrounding John Kerry with a team that has credibility across the intersection of economics, climatology, investment management, and engineering.  Our planetary addiction to fossil fuels needs a multi-decade rehab plan that requires unprecedented collaboration across the public and private sectors on the scale of the Marshall Plan and War Powers Act.  

From Adolescence to Responsible Citizenship

As the professional body for the alternative investment industry, CAIA’s mission is to improve financial and societal outcomes through professional education, transparency, and thought leadership.  Our north star is to foster a more virtuous profession that serves the client and creates a fulfilling career for our Members. Significant reform, standard setting, and professional maturity is needed amongst this rapidly growing portion of the industry.  

While industry-led standards are likely a better path for many of these topics, the SEC should play an important role in pressuring consensus and action on the following subjects: 

Uniform methodology on performance presentation: Over-reliance on Internal Rate of Return (IRR) to promote past performance of private capital can be misleading.  Instead, the industry should move to a standard mosaic of methodologies that strengthens users understanding of the actual timing and performance of capital flows.  GPs should also improve their operating expense transparency as part of this calculus. These measures will mitigate opportunity for manipulation and misunderstanding.

Improved alignment of Manager and Investor: The standard carried interest arrangement of general partners (GPs) is a nearly free option with asymmetric payoff benefits.  The industry should move to an expectation of higher capital commitments by GPs alongside of investors and sharing of both upside and downside. While emerging managers may need special consideration, only through this true alignment of interest should “carry” be taxed as capital instead of income.  

Consistent Fiduciary standard:  Bespoke client term sheets and side letters are rife with fiduciary exceptions.  The SEC should make clear that limited partners (LPs) interests always come first and provide significant scrutiny to the unhealthy and inappropriate proliferation of irresponsible debt covenants, dividend payouts directly to GPs, and overly levered portfolio company balance sheets.

Regulatory oversight and influence is a critical ingredient to any industry’s journey to a profession and we need your support.  If we can lower the vitriol and turn our attention solely to cultivating a healthy and fair financial ecosystem, investors and their retirement security will be well served.


John L. Bowman is Senior Managing Director at the Chartered Alternative Investment Analyst (CAIA) Association.

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