A major wealth management house has weighed in about the SEC's move last week to adopt changes to how the "accredited investor" rules work - with the impact of widening access to private capital markets.

US wealth management firm Baird has welcomed last week’s decision by US regulators to widen access to private capital assets.

The Securities and Exchange Commission has adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to invest in private capital markets. For example, people can qualify as accredited investors based on professional certifications, designations or other credentials from an educational body. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been barred from this sector.

“I view this news from the SEC favorably. At a time when there are fewer and fewer public companies, and when stock market indices are highly concentrated and dominated by a few (mostly technology) companies, and when equity valuations are disconnected from the underlying economy, increasing the choices available to American investors makes sense,” John Taft, vice chairman of Baird, said. 

“Institutional investors are increasingly moving their allocations away from public markets to private equity and venture capital in order to improve their returns. Managers of private equity are currently sitting on enormous war chests of cash, which can be deployed at attractive valuations in private companies (vs. public market indices),” Taft continued. 

Earlier this week, the SEC’s move drew a cautious reaction from John Bowman, senior managing director with the CAIA Association, an educational organization in the alternative investments space. He argued that while the accredited investor designation needed to be modernized, he said the change happened at a time of concern over whether the new Regulation Best Interest regime would work as intended. (For more about Reg. BI, see here and here.)

As noted before, the SEC’s move plays to how investment flows into private capital markets (equity, debt, real estate and infrastructure) .These have expanded in recent years, driven by a perceived higher rate of return, albeit with less liquidity than among listed equities and mainstream bond markets.

Baird’s Taft concluded: “The key, as always, is to make sure investors are either able to understand the risk/reward trade-offs associated with private equity. The SEC’s proposal would do that, supplementing net worth and income tests with credentials that evidence understanding of securities markets.”

Baird’s Private Wealth Management business has client assets of more than $215 billion, making it one of the largest such houses in the US.