No one who works in the private equity industry can complain of boredom. As the market has become more complex and more global, surprise has become the norm.
Take, for example, the news last May that Kohlberg Kravis Roberts listed a fund on the Euronext Amsterdam exchange. That KKR was able to raise $5 billion was in itself impressive, but the cross-border complexity of the deal also placed an exclamation point next to the oft-repeated point about this being a global industry. Here was a New York firm creating a limited partnership under the laws of Guernsey, then placing units according to Dutch securities law, then listing the units on a pan-European exchange. The units are deposited in a US bank and the subscription agreement is subject to the US 1940 Act.
Or how about a transaction announced in February that saw Ripplewood Holdings, a US private equity firm, investing in an Egyptian bank through a Japanese holding company that is listed on the Euronext?
Wherever private equity GPs go in search of good investments, and wherever they form capital, they are subject to regulations, and while GPs can try hard to maintain control over deal structures, business strategies and exit options, they have almost no control over regulatory change. They can only control how they prepare for and respond to regulatory contingencies.
With even plain-vanilla private equity deals now involving regulations in multiple jurisdictions, a regulatory change or uncertainty in one place can have a ripple effect that moves from the underlying asset all the way into the wallets of the individual GPs and LPs.
Private equity is facing looming regulatory changes around the world. PEM looks at the hottest regulatory issues in the most important markets, and analyzes how these changes may help or hinder the growth of private equity.
For example, largely as a result of the controversy surrounding Lone Star’s acquisition of Korea Exchange Bank, the South Korean tax authorities are reportedly pondering whether or not to cancel a number of tax treaties, including one with the Malaysian haven of Labuan, in which many private equity partnerships targeting Korea are based. Such a move would change the game entirely and unexpectedly for the few private equity firms to have invested in the country, including Texas-based Lone Star.
For this article, Private Equity Manager surveyed legal and tax experts around the world to determine what regulatory issues loom largest for private equity in key markets. It was hard to pick just one issue from each country, as the managers of private equity firms must now keep track of regulatory uncertainty coming from myriad directions. If you think most of these looming uncertainties do not apply to your firm, think again. Several years ago, even Henry Kravis would have probably laughed if someone told him he’d soon be listed in Amsterdam, managing investments in India and pondering labor laws in Japan. But to keep pace in a competitive global investment market, that is exactly what his firm is doing.