‘Complex web’ of regulation pushes up GP’s costs

Eight out of 10 GPs think compliance costs are climbing faster than other operating expenses, according to a survey conducted by fund administrator SEI’s investment manager services division.

The results reflect the increased scrutiny GPs are facing from regulators. Between 2014 and 2015, 47 percent of private equity firms were subjected to a regulatory audit or examination, compared to only 28 percent in 2013, according to an EY study.

GPs operating globally are more affected by the growing compliance burden, since complexity and cost can multiply when dealing with more than one jurisdiction, SEI found. “Some markets may ultimately be deprived of private equity capital simply because regulatory barriers are too high for already stressed GPs,” said SEI.

GPs are also under more pressure from LPs; the survey found that 65 percent of LPs are increasing the level of operational due diligence performed on GPs.

“Many of these [LPs] are building out their internal capabilities, while others are engaging independent consultants to bolster their due diligence efforts. Investors are now much more likely to ask for information not covered by standard due diligence questionnaires, focusing considerable attention on areas like cybersecurity that might have been overlooked in the past,” said SEI.

But increased due diligence activity has not put LPs off investing. Strong cashflows and returns mean 64 percent of LPs plan to increase their allocation to private equity over the next few years, up from 26 percent five years ago.

“The private equity market is in a period of rapid growth and diversification. The demand from investors has afforded managers significant opportunities,” said Philip Masterson, senior vice-president of SEI’s investment manager services division, and head of its international business. 

“In order to take advantage of these growing opportunities, GPs must address the unprecedented challenges facing them from a wide gamut of parties. Chief among them are the complex web of regulatory requirements coupled with increasingly demanding investor expectations that has put a strain on both the operational infrastructure and talent retention.”

SEI’s investment manager services division provides fund administration services to global investment managers focused on private equity and hedge funds, mutual funds, exchange traded funds, collective trusts, and separately managed, as well as institutional and private clients representing more than $15 trillion in assets under management.