Future focus: Regulatory compliance

The regulatory complexity of private markets today is unprecedented and the consequences of falling foul of the rules ever more severe. “With fines growing larger and the reputational stakes at an all-time high, regulatory compliance is steadily climbing GPs’ agenda,” says David Sarfas, co-head of fund solutions at CSC. “Providers with dedicated teams who have boots on the ground and access to a full suite of solutions are increasingly leading the market. A systemic and integrated approach to the requirements is key.”

The second incarnation of Europe’s flagship private markets regulation, the Alternative Investment Fund Managers Directive (AIFMD), is on its way and managers and their service providers are busy carrying out scoping exercises and identifying where changes will need to be made. “The amendments necessitate some additional reporting, with a focus on private credit and buyouts,” says Alexander Traub, chief commercial officer at Alter Domus. “We are supporting our clients with those requirements.”

ESG regulation also continues to dominate in Europe. “That is requiring a lot of data gathering and data crunching,” says Serge Weyland, director general at the Association of the Luxembourg Fund Industry. “I believe it will also continue the drive towards outsourcing. GPs are increasingly relying on their fund administrators to host their portfolio company’s ESG data for reasons of cost efficiency. As well as facilitating regulatory compliance, ESG reporting also promotes alignment with investors, supports investment decision-making and can ultimately add value.”

With the exception of the sustainability agenda, the regulatory backdrop in Europe has been relatively stable. “Outside of SFDR [the EU’s Sustainable Finance Disclosure Regulation], which is still in its infancy, we’ve not had any seismic regulatory changes in recent years,” says James Duffield, group head of business development at Aztec. “There has been a tightening of substance rules in the Channel Islands and Luxembourg and evolving tax and reporting requirements, but nothing that has resulted in a revolution rather [than] evolution of our offering.”

In the US, however, that regulatory landscape has been radically altered. “The new SEC Private Funds Adviser rule will have significant implications across all aspects of fund operations – the impact and complexity of which will undoubtedly lead to more US managers choosing to outsource,” Duffield explains.

“The regulatory regime has been relatively strict and all-encompassing in Europe for some time under AIFMD, but now it is the turn of the US,” says Traub. “Going into 2025, many funds will have to produce monthly disclosures to the SEC.”

There are other regulatory developments on the horizon that are commanding less column inches. Sarfas points, in particular, to ATAD III. Also known as the ‘Unshell directive,’ this EU directive aims to mitigate the misuse of shell entities for tax purposes. “That regulation brings with it possible negative implications for entities beyond those prescribed, making it crucial for GPs to ensure that the entities within their fund structures fall within the ambit of the directive,” says Sarfas. “This is just one example of a myriad of incoming regulations that GPs must contend with.”

Weyland, meanwhile, points to the prospect of regulation designed to tackle any systemic risk emanating from the non-bank financing market. “The real economy is increasingly being financed by funds, and we have seen a large number of private credit vehicles being set up in Luxembourg in recent years,” he says.

“The role of those funds in Europe’s economic development is paramount, not least because banks alone will not be able to shoulder the cost of the energy transition and digital transition. The fact that these funds are typically closed-end means systemic risks are limited and we believe that with adequate reporting this is an industry that can be well monitored. But it is clear that regulators are keeping a close eye on these developments.”

Wherever the next wave of regulation should come from, managers will want their service providers to be ahead of the curve. “As regulatory compliance requirements change, GPs are looking to their providers to share subject matter expertise with them and discuss how these regulatory changes will impact their current or future products,” says James Jefski, global head of client solutions for private markets at State Street.

“Service providers need to be plugged into and keep pace with regulatory changes and provide solutions which address the changes either directly or across the ecosystem via partners who may provide value-add specialization.”