Over the past few years, financiers who manage almost $30 trillion in private equity, hedge and venture capital funds have shed their reluctance to exert political influence. Steven Mnuchin brought hedge fund experience to his role as the head of the Treasury during President-elect Donald Trump’s first term. More recently, Glenn Youngkin moved from private equity to the governor’s mansion in Virginia. But no presidency has been as thoroughly surrounded and supported by the private fund industry as America’s incoming administration.
Mr. Trump’s family, fund-raisers and financial lieutenants are more likely to be fund managers than any prior presidency, including his first term. Vice President-elect JD Vance and Donald Trump Jr. have been or have become venture capitalists. The president-elect has also tapped Scott Bessent, a hedge fund manager, to serve as Treasury secretary.
The investment portfolios and civic institutions these managers govern could hold a clue to what they may likely do: concentrate ever more control over our financial system into substantially less regulated, less transparent capital markets dominated by firms and financiers about whom Americans know very little.
If he becomes secretary, Mr. Bessent will be the second nominee to move from managing hedge funds to leading the Treasury Department. Previously, the role was more of a sinecure for alumni from the famous houses of Wall Street’s ancien régime, investment banks: Henry Paulson, who led the department under President George W. Bush, and Robert Rubin, under President Bill Clinton, were both Goldman Sachs veterans. But while investment banks are heavily regulated and advise others, private funds are largely unregulated and invest on their own behalf.
Private money is eclipsing everything, even the old Wall Street titans. The private industry thrived on the Biden administration’s low interest rates and stock market highs. In four years, assets in private funds grew 34 percent, to nearly $28 trillion in 2023 from $20.8 trillion in 2020; the number of private funds grew 59 percent, to 100,940 in 2023 from 63,427 in 2020. By comparison, the total amount of money in public mutual funds, exchange-traded funds and closed-end funds is just under $31 trillion — meaning that the exception has very nearly surpassed the securities rules for funds.
In recent years, boards of trustees running America’s most prominent universities, museums and artistic centers have come to be dominated by fund managers. Joshua Bekenstein, the senior trustee of Yale University’s board, was co-chairman of the private investment firm Bain Capital; Marie-Josée Kravis, chair of the Museum of Modern Art’s board, is married to Henry Kravis, co-founder of the private equity firm KKR & Co.; and the Kennedy Center’s board is led by David Rubenstein, a co-founder of the private equity firm Carlyle Group.
When the Senate considered eliminating the carried interest loophole in 2022, a tax provision that treats fund managers’ returns as capital gains rather than ordinary income, Senator Kyrsten Sinema — then a Democrat who received $2.2 million in campaign contributions from investment firms — forced Democrats to preserve it. When university presidents embroiled in campus protests disappointed fund managers and multimillion dollar donors, including Bill Ackman, Ross Stevens and Marc Rowan, those managers soon pushed for — and received — the presidents’ resignations.
What these investment funds share is their eponymous privacy. Privacy that obscures how risky their trading strategies might be, how much leverage they are using and what sort of preferential treatment they are giving some investors over others. By confining their pool of participants to a small group of sophisticated investors — typically, university endowments, sovereign wealth funds, pension pools and other wealthy entities — these funds are structured to avoid the federal securities regulations that would otherwise oblige them to publish registration statements, quarterly reports and similar sources of information about how they operate their firms and compensate themselves.
Depriving the market and regulators of that information belies the systemic risk these funds generate, such as those that triggered the failure of the highly leveraged hedge fund Long-Term Capital Management in 1998 and a pair of Bear Stearns hedge funds that collapsed at the outset of the 2008 financial crisis.
When the Securities and Exchange Commission did adopt rules relating to private fund managers in 2023, the industry sued to vacate them. The rules would have required managers to give their own investors — not the public nor the S.E.C. — standardized information about their fees and performance and, among other things, to obtain an annual audit for their funds to provide an independent verification of managers’ numbers.
Not all investors in private funds are big investors; some are humbler county pension funds with a legal obligation to invest a certain percentage of their assets in private funds. But fund investors, both small and large, were sufficiently concerned about the relative paucity of information and unevenness of this playing field to ask the S.E.C. to promulgate these rules. Nevertheless, at the behest of a trade association of private fund managers formed in Texas reportedly for the purpose in 2022, the Court of Appeals for the Fifth Circuit struck down these rules.
So what will a private fund presidency look like?
One of the industry’s primary goals now is to break down the bulwark separating private fund investments from the life savings of ordinary Americans. U.S. securities laws currently limit investments in private funds to wealthier investors.
The prominent fund managers who backed Mr. Trump’s candidacy have welcomed his victory with calls for new directions in policy. “The shackles are off,” Tyler Winklevoss, a tech executive who co-founded the cryptocurrency exchange Gemini and a Trump supporter, wrote on X last month. Managed Funds Association, the trade group that represents fund managers, has called for the Trump administration to “promote the expansion of private and public markets” and — now, after their Fifth Circuit win — to “change the adversarial relationship between policymakers and market participants.”
Under Mr. Trump, the S.E.C. and the Department of Labor could be pressured to allow some of the $8 trillion sitting in 401(k) savings to be invested in private funds. Of course, the reason that “shackle” currently exists is that private funds, by operating largely outside of securities regulations, engage in riskier investing behavior and are not transparent about their activities.
Should anything go amiss with those investments, the losses would fall upon American nest eggs. Then it would be millions of ordinary Americans, not just wealthy fund managers, seeking government support for poorly performing private funds.
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