Regulation not biggest challenge for PE

Only about one in four private equity managers rate regulation as their greatest challenge, according to a recent survey by financial services business State Street. This compares to 41 percent of hedge fund managers who cite regulation as a top concern and 40 percent of real estate managers who say the same.

However, the study should not be interpreted to mean that new regulations are not a concern for private equity advisors, said in an interview Steve Langton, State Street’s vice president of alternative investment services. Instead, Langton suggests that other matters are at the top of GPs’ list of priorities.

“I don’t think it is a case that private equity managers care less about the impact of regulation, but more of a case they have greater business challenges, namely fundraising and generating investment returns, to focus on in the current stage of the economic cycle,” says Langton. “Ironically, both of which [fundraising and generating returns] will be impacted by regulation in some shape or form.”

It is unclear what competing challenges fund managers could cite as a bigger concern than regulation. State Street was unable to respond for a request to clarify before press time.

The study – which canvassed the opinions of some 400 private equity, hedge and real estate fund managers in North America, Europe and Asia – also shows that a fund manager’s geography impacts his or her view of regulation as a top concern.

European managers are the most affected by regulation, with half (50 percent) citing it as a top challenge. In Europe, the Alternative Investment Fund Managers Directive is currently being implemented across all 28 member states. The pan-EU law introduces new reporting requirements, oversight and pay rules on EU-based fund managers or GPs seeking EU investment.

Of the directive’s many provisions, pay rules were pegged as the biggest compliance challenge, with 56 percent of European alternative fund managers saying remuneration rules will have a negative impact on their firm.

In Asia, where private equity regulatory regimes are still relatively nascent compared to the West, only 26 percent of fund managers viewed regulation as a top concern. In places like China, authorities have only just recently crowned a sole regulator responsible for supervising private equity markets. India too is in the process of carving a bespoke marketing regime for private fund managers. Despite the troubles that come with forging a new domestic regulatory system, fund managers in Asia say foreign regulations are their bigger concern. Almost half (40 percent) of Asia-based GPs named the US’ Foreign Account Tax Compliance Act (FATCA) as having a negative impact on their business, more than any other regulation.

In the US, 35 percent of fund managers cite regulation as a top concern. The Dodd-Frank Act recently required large US private fund managers to register with the Securities and Exchange Commission (SEC), a rule that brought the possibility of surprise examinations by inspectors. According to State Street’s research, this is proving to be the biggest regulatory challenge in the US, with nearly two-thirds (64 percent) of US respondents naming SEC registration and Form PF provisions of Dodd-Frank as negatively impacting their business.