While there are some individual states that require a private fund adviser to register as an exempt reporting adviser ("ERA") or registered investment adviser ("RIA") at the state level, private fund advisers generally register as an ERA with the Securities and Exchange Commission ("SEC") when managing less than $150 million in private fund assets and register as a SEC-registered RIA when managing $150 million or more in private fund assets. Our recent analysis of publicly available private fund data, including detailed private equity and hedge fund data, published by the SEC reveals that SEC-registered exempt reporting advisers and private funds are perhaps the fastest growing segment of the investment adviser industry.
The Impressive Growth of Exempt Reporting Advisers and Private Fund Advisers
From Q1 2013 to Q1 2018, the number of ERA firms has grown at a 7.6% compound annual growth rate ("CAGR"). According to Form PF data, over that same five year period of time, the number of private fund advisers registered as investment advisers with SEC has grown at a 3.6% CAGR. As the chart below depicts, since 2014, the number of SEC-registered ERAs has surpassed the number of private fund advisers registered with the SEC as RIA firms:
Source: Publicly available Form PF and exempt reporting adviser filing data available on sec.gov. Note: "ERAs" only includes SEC-registered ERA firms and excludes any state-registered ERA firms. "RIAs" only includes private fund advisers registered with the SEC as RIA firms that file a Form PF.
Furthermore, as of April 1, 2019, there are now over 4,000 SEC-registered ERA firms as exempt reporting adviser growth continues to accelerate with the total number of SEC-registered ERA firms increasing by 9.9% from the end of Q1 2018 to the end of Q1 2019.
Are Private Equity or Hedge Funds Driving the Growth of Private Funds?
From 2013 to 2018, the total number of hedge funds and private equity funds advised by SEC-registered RIA firms filing the Form PF has grown from 14,674 to 20,715 funds at a 5.9% CAGR. Presently, the average SEC-registered private fund advisory firm manages 10.1 private funds compared to 8.5 private funds in 2013.
Most of this growth has come from the private equity fund industry. From 2013 to 2018, the total number of private equity funds increased at an 8.7% CAGR compared to a 3.0% CAGR for hedge funds. As the chart shows below, beginning in 2016, the total number of Form PF-filing private equity funds has surpassed the number of Form-PF filing hedge funds:
Source: Publicly available Form PF filing data available on sec.gov. Note: Excludes other types of private funds including liquidity funds, venture capital funds, etc.
Comparing the Growth of Private Fund Advisers to the Broader RIA Industry
From 2013 to 2018, the total number of state and SEC-registered RIA firms (including private fund advisers) has grown from 27,878 to 30,193 firms at a 3.0% CAGR. Presently, the 3,207 SEC-registered RIA firms advising private funds represent about 23.9% of the 12,643 total SEC-registered RIA firms. Here are the CAGRs by industry segment comparing the growth of private fund advisers and more traditional investment advisory firms from 2013 to 2018 (as measured by total volume of firms):
- SEC-registered ERA Firms: 7.6%
- SEC-registered RIAs advising private funds: 3.6%
- SEC-registered RIAs (not advising private funds): 2.8%
- State-registered RIAs: 0.3%
The chart below shows the historical growth in the number of state and SEC-registered RIA firms, SEC-registered exempt reporting advisers, and SEC-registered private fund advisers:
Source: Publicly available Form PF, registered investment adviser, and exempt reporting adviser filing data available on sec.gov. Note: "ERAs" only includes SEC-registered ERA firms and excludes any state-registered ERA firms. "SEC-Registered RIAs" only includes SEC-registered RIA firms that do not file a Form PF.
Be sure to check back soon as we continue to provide additional analysis on the private fund industry including a deeper dive on hedge fund and private equity fund filing data.