In new research, Sureyya Burcu Avci, Cindy Schipani, and H. Nejat Seyhun assess and justify the United States Securities and Exchange Commission’s failed attempts to regulate potential fraud and deception in the private equity market by examining the performance and potential conflicts-of-interest in de-SPAC transactions.
Is private equity for everyone? The United States government seems to think it is. On August 7, 2025, President Donald Trump issued an executive order (EO) directing agencies, particularly the Department of Labor, to consider reducing regulatory hurdles preventing pension funds’ and retail investors’ access to private equity markets. The logic of the EO is to even the playing field for the little guy by giving retail investors without the millions of dollars normally required to invest in private equity the opportunity to earn private equity’s misleadingly advertised so-called high internal rates of return. However, this would also expose retail investors’ retirement investments to private equity’s risks, particularly its opacity and rampant conflicts of interest, while earning no higher returns than public equity. This can cost private equity investors sizable portions of their investments.
Indeed, the Trump administration’s EO to expand access to private equity has not aligned with stricter regulation from the U.S. Securities and Exchange Commission (SEC) that protects investors from private equity’s wild west nature. In August 2023, the SEC instituted new rules focusing on greater transparency designed to prevent fraud, deception, and manipulation by private investment advisers. The new disclosure rules covered investment advisers’ compensation schemes and sales practices. It also attempted to regulate potential conflicts of interest in the private equity industry. These disclosures were not previously required from investment advisers. Ultimately, the Fifth Circuit Court shut down these efforts, arguing that the SEC overstepped its authority and hadn’t properly proved that its rules would stop the fraud and manipulation it claimed to address.
In a forthcoming paper, we justify the SEC’s efforts to regulate private equity funds by examining the performance of de-SPAC transactions using private funds (PIPEs). A private company goes through a de-SPAC transition when it merges with a special purpose acquisition company (SPAC) in order to go public. Because PIPEs occur in public companies, investment performance information is publicly available. Thus, we are empirically able to determine whether limited private-fund investors are getting a fair deal in these investments. Our research quantifies how much private equity investors lose to the lack of quality disclosures of conflicts of interest.Â
The importance of SEC rules in private investment
Most private equity funds are organized as closed-end funds, in which the general partners (GPs) manage the fund and the limited partners (LPs) provide capital. The funds generally have a fixed life of approximately ten years. GPs typically provide one percent of the total capital, while the remainder comes from LPs and debt capital.
Private equity funds, estimated to exceed $30 trillion in 2025, provide substantial equity and credit funding to small, nonpublic firms. By definition, these investments are private, opaque, illiquid, fraught with potential conflicts of interest, and carry high levels of business and financial risk. Private equity funds typically bar their LPs from selling their holdings for years, resulting in extreme illiquidity for the shareholders. Private investments are typically made in high-default-risk private firms in need of capital, thus presenting a high-risk profile. There is no public trading of their portfolio companies’ shares, resulting in complete lack of transparency regarding the value of the private equity holdings. Fund managers use self-reported portfolio values to price these investments, resulting in artificially smooth pricing that belies the actual risk of these investments, even when the portfolio’s actual market value can fluctuate wildly. Because of this, estimated net asset values reported to the LPs can diverge significantly from the actual market values that would be reported if the fund were public.
Furthermore, potential conflicts of interest between the GPs and LPs can tremendously distort incentives in the private equity business. The SEC has taken measures in the form of rules for private fund advisors (PFA) that require the disclosure of conflicts of interest between an investment advisor and fund investors. This risk is especially true in specific areas of dispute: multiple clients investing in the same portfolio company, financial relationships between investors and the adviser, and preferential liquidity rights. Traditionally, only accredited investors were allowed to invest in private investments because, by meeting investor sophistication or minimum wealth requirements, accredited investors were presumed to be able to protect themselves without the SEC’s oversight. However, as explained in the following section, that proved to not be the case.   Â
What the SEC aimed to address
In the PFA rules, the SEC addressed five specific areas where conflicts of interest are most prevalent. First, in response to the prevalence of misinformation provided to investors in private funds, the PFA rules require additional disclosures by advisers about actual and potential conflicts of interest with the fund.Â
Second, to address conflicts of interest in adviser-led transactions, the SEC promulgated the Adviser-Led Secondaries Rule to provide a check against conflicts of interest for an adviser structuring and leading a transaction where they stand to profit at the expense of the fund’s investors. Conflicts of interest in adviser-led transactions stem from the private fund adviser being on both sides, potentially placing its interests at odds with those of private fund investors. This can occur, for example, when private fund advisers exert substantial influence over a portfolio investment, such as when the advisers “own…a sizable but non-controlling share of the investment or if the portfolio investment is otherwise dependent on the adviser to operate its business.”
Third, the SEC identified compensation schemes that are “contrary to the public interest,” noting that “such allocations create a conflict of interest because they provide an incentive for an adviser to place its own interests ahead of the private fund’s interests.” In response, the SEC aimed for the PFA rules “to restrict the practice of charging or allocating fees and expenses related to a portfolio investment (or potential portfolio investment) on a non-pro rata basis.”
Fourth, the SEC explained that when advisers borrow from private funds, a conflict arises because the interests of the funds may misalign with the adviser’s interests. Similarly, the SEC noted that conflicts arise when private fund advisers are in financial distress as the fund’s interests may conflict with the adviser “seeking to discharge the liability or otherwise renegotiate more favorable terms for itself.”
Finally, the SEC sought to address conflicts of interest that arise when advisers have incentives to provide preferential terms to themselves and one or more investors at the expense of other investors. Preferential treatment can occur when an adviser waives all or part of their confidentiality obligation for one investor. This waiver harms other investors, as the information may become available to third parties and thereby negatively impact the fund’s competitive advantage.
In one example of SEC enforcement in response to conflicts of interest, the SEC brought action against private fund advisers for misallocating $17 million in expenses to the “adviser’s flagship private equity fund and improperly allocating approximately $2 million of compensation-related expenses to three private equity funds” the adviser managed. The SEC elaborated that concerns about conflicts of interest are especially acute when private fund advisers grant preferential redemption rights or adopt problematic compensation schemes. Despite these tremendous hurdles, if these investments are to be deemed appropriate for small, unsophisticated retail investors, they would be better for the LPs, yielding huge returns.
The SEC’s attempts to bring fairness and greater transparency to the private funds industry were, however, thwarted in June 2024, when the Fifth Circuit Court of Appeals unanimously vacated the SEC’s new rules in National Association of Private Funds Managers v. SEC. The Fifth Circuit held that the SEC needed to state with specificity the fraud or deception that the rules are intended to address. The court found that the SEC lacked authority to promulgate these regulations, in part, because it had not established, with specificity, a link between the new rules and the prevention of fraud or deception.Â
The Fifth Circuit squarely put the SEC in a classic Catch-22. Without disclosure requirements, there is little or no data on private funds to determine whether the existing disclosures are deceptive or the investments are fraudulent. Without the specific data, it is nearly impossible to satisfy the court’s specificity requirements; thus, there can be no regulation.
The purpose of SPACs
Our research focuses specifically on Special Purpose Acquisition Companies (SPACs) because they are non-operating “shell” companies. The sole purpose of a SPAC is to take over a private company via a reverse merger, called a “de-SPAC” transaction. In cases of funding shortages, SPACs resort to supplemental financing by Private Investment in Public Equity (PIPE). Here, private investors provide the additional needed capital to enable the takeover of the private company. Both of these structures, SPACs and PIPEs, are characterized by a high degree of agency problems and misaligned incentives. In SPACs, the primary conflict of interest arises because SPAC sponsors only get paid if a deal closes within two years. If the sponsors do not consummate the acquisition within two years, they risk forfeiting their initial capital and lucrative founder shares. Hence, SPAC founders would prefer to pursue value-destructive acquisitions for their LPs rather than liquidate the SPAC. The systematic underperformance of realized returns for LPs relative to the guaranteed gains ofGPs empirically substantiates the presence of these conflicts, suggesting that the structural design of SPACs inherently prioritizes sponsor compensation over public shareholder value.     Â
Evidence of major losses in de-SPAC transactions
How do the lack of transparency and disclosures of conflicts of interest cost private equity investors? We use de-SPAC transactions to quantify this loss, as the tail end of the transaction that brings in the investment public shows the market difference between what the advisors claimed the funds’ value was versus what it actually was. We find that de-SPAC investors lose about 45% of their investment within two years of the de-SPAC transaction. Furthermore, we find that almost all these losses are limited to cases in which the sponsors resort to PIPE financing, resulting in an abnormal loss of about 55% of their value. Hence, our evidence suggests that limited private-fund investors suffer substantial and systematic losses when they make PIPE investments in SPACs.
Furthermore, we demonstrate that the performance of PIPE-financed de-SPAC transactions has worsened over time, consistent with the conflicts-of-interest hypothesis. Ultimately, whether these firms are successful in the long-term, SPAC transaction sponsors get shares when a de-SPAC transaction is completed. On the other hand, shareholders and PIPE investors only benefit when the firm does well in the market, reflecting a potential conflict of interest that could result in unprofitable de-SPAC transactions. These trends have also been getting worse over time—since 2021, de-SPAC targets have been rapidly losing more value. Thus, our evidence at least partially justifies the SEC’s proposed new rules: these investments require additional disclosures even for sophisticated accredited investors, let alone unsophisticated retail investors. This may also be the ideal time to introduce reforms as investors are seeing substantially fewer returns.
Policy implications
We propose several policy changes to address these issues. These include urging the SEC to utilize its authority under the Investment Advisers Act to pursue fiduciary duty breaches of investment advisers to private equity funds, which includes the GPs of those funds as investment advisers to the funds. We also encourage the SEC to make another attempt at PFA rulemaking citing studies, such as this one, to demonstrate that disclosure rules are directly linked to the prevention of fraud and deception. We urge Congress to grant the SEC explicit authority to regulate private fund advisers to protect private investors. As this article shows, accredited investors can be easily deceived without full and fair disclosures. The need to address this matter has become more urgent than ever in light of the recent EO that further opened pension funds’ access to private equity markets, thereby exposing retail investors’ retirement investments to these risks.
Authors’ Note. This article summarizes the findings of Sureyya Burcu Avci, Cindy A. Schipani & H. Nejat Seyhun, ”The Need for Regulation of Private Equity: Evidence from De-SPAC Transactions,” 111 Iowa L. Rev. 539 (2026).
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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