📈 PE Sues SEC, Blackrock launches 3rd retail focused fund

While mainstream media outlets are talking about the Apple-China conflict, the still pending real estate crisis, and more Elon Musk drama…

Here’s the news we’re paying attention to at Private Capital Insider this week.

• After SEC Chairman Gary Gensler announced the much-anticipated private fund rules, industry groups are suing the SEC.
  

• Blackrock continues it’s Quest for Retail Money as it launches Blackstone Private Equity Strategies Fund, a leveraged buyout fund.

Let’s dive in,

Equifund Publishing

Private Equity Sues the SEC

In a previous Weekend Edition, The SEC vs the $20 Trillion Private Fund Industry, we first wrote about the new SEC rules for private funds.

And to no surprise, private equity isn’t happy about Chairman Gensler’s new oversight rules… even after the department watered down their original proposal.

At the time of publishing, six trade groups – including the Managed Funds Association, American Investment Council, National Venture Capital Association, and the National Association of Private Fund Managers – have filed a lawsuit seeking to block the SEC from implementing its Private Fund Advisers rule.

The lawsuit, filed in the business-friendly 5th Circuit Court of Appeals, argues the SEC exceeded its legal authority, and failed to follow proper administrative procedures in adopting the rules.

And again, to no surprise, they are claiming these new rules will essentially cause them to make less money, and therefore are “bad for the industry.”

“It will discourage competition, harm investors, reduce returns, stifle innovation, and impose costly burdens on funds of all sizes,” said Drew Maloney, Chief Executive of the American Investment Council, which lobbies for private equity.

But rather than seeking modifications to the new rules, these industry groups want the rules thrown out completely.

Normally, this story would simply be another “business as usual” lawsuit from special interest groups seeking to protect their margins…

But where this story gets interesting is the basis for the challenge – If courts determine the SEC lacks authority to regulate private funds, it could threaten other areas of SEC jurisdiction.

Why? It all has to do with how Gensler is arguing the SEC does, in fact, have jurisdiction to pass the new rules; the antifraud statute.

The SEC antifraud statute refers to Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. This statute and rule forms the basis for many SEC regulations prohibiting fraud in the securities markets.

Some key details:

• Section 10(b) prohibits using any "manipulative or deceptive device" in connection with the purchase or sale of securities. This became the foundation for SEC rules targeting securities fraud.
  

• Rule 10b-5 specifically bans making false or misleading statements related to securities trading. This includes omitting material information that could mislead investors.
  

• Section 10(b) and Rule 10b-5 were established in response to the 1929 stock market crash and abuses that led to the Great Depression. The goal was to restore investor confidence in the capital markets.

These authorities have been used by the SEC to file enforcement actions against insider trading, accounting fraud, and other deceptive practices that could hurt investors.

The breadth of Section 10(b)/Rule 10b-5 has been debated in courts, but generally provides the SEC broad powers to combat securities fraud.

Plaintiffs argue the SEC exceeded the statute in regulating private funds. But 10b-5 has enabled many core SEC regulations on public companies and markets for decades.

With pro-business judges holding a majority in the 5th Circuit Court, the lawsuit represents a serious challenge to the SEC's power. 

A recent ruling against the SEC's rejection of a proposed bitcoin ETF shows the agency faces headwinds in defending its authority.

And while we have our own opinions about how the SEC has handled the whole crypto thing…

Should the SEC lose this case, it could have wide-reaching consequences that go beyond private funds; The antifraud statute the SEC relied upon to write the rule is the same piece of law that it uses to regulate other asset managers.

According to Tyler Gellasch, president of investor trade group Healthy Markets Association:

It’s still too early to tell how this conflict comes to a resolution, but selfishly speaking, we are rooting for the SEC to win this one.

Blackstone Launches Third Retail Focused Private Equity Fund

We’ve written about Blackstone – and their ongoing Quest for Retail Money – several times in the Weekend Edition.

Currently, they have two products – The Blackstone Real Estate Income Trust and the Blackstone Private Credit Fund.

And now, they are getting ready to launch their third product, the Blackstone Private Equity Strategies Fund (BXPE), which aims to give retail investors access to the trademark PE strategy – leveraged buyouts.

Blackstone would begin taking investor commitments for BXPE in the fourth quarter, and planned to launch the fund in January, said the people familiar with the matter.

To bolster demand, Blackstone is offering investors a six-month fee holiday.

Afterwards, the fund will charge a management fee of 1.25% of assets, and a 12.5% performance fee above a 5% annual hurdle rate.

But just like all other perpetual funds, Blackstone is under no obligation to sell assets and return cash to investors.

BXPE inauguration has been delayed for quite some time now, as Blackstone shelved the launch late last year, after its flagship property fund was forced to limit redemptions, the report said, adding that it had earlier also delayed raising capital for it.

The New York-based investment manager limited withdrawals from its $70 billion unlisted Real Estate Income Trust last year, after a surge in redemption requests, an unprecedented blow to a franchise that helped it turn into an asset management behemoth.

We’ll keep you updated as this product begins to roll out in Q4/Q1.