Two years ago there was a real feeling of dread over new regulations permeating private equity.
At the time SEC inspectors began paying visits to newly-registered advisers without a great understanding of the asset class. In Europe, there were legitimate concerns that the AIFMD would erect a regulatory ring-fence around outside managers wanting in. China was sending mixed signals on which of the many government agencies was even responsible for writing private equity rules, and FATCA was a global concern that tested the nerves of even the most unwavering CCOs.
The industry's argument at the time was that all this new red tape would entangle GPs on the fundraising trail, reduce investment in the economy and kill off firms unable to absorb the projected high compliance costs. Two years on, was the industry right to be worried?
If anecdotal evidence is anything to go by, not really. In 2014, GPs have taken a noticeably different tone when chatting about the current regulatory environment with pfm. We used to hear words like “nightmare”, “confusing” and “impossible” when talking to CFOs/CCOs; now we more often hear “annoying”, ”challenging” and even “feasible”.
So what changed? Our take is that there’s simply more clarity (and fruitful lobbying efforts to educate policymakers about the industry). Sure, we’re not out of the woods yet, we probably never will be, but no one seriously believes anymore that AIFMD is an impossible compliance hurdle to clear for any determined non-EU manager. What’s more, new regulations haven’t fundamentally shaken up firm operations in the way that many feared they would. AIFMD Annex IV reporting is no walk in the park, but GPs tell us they’re managing to adapt. In the US, the SEC has put together an inspections team dedicated to understanding all the nuances within the private funds model, and in China the CSRC was unmistakably labelled the country’s private equity regulator. FATCA has been delayed enough times that compliance here is easier than expected too.
More importantly though is the argument around cost. As a proxy for what kind of figures we’re talking about here, the SEC estimates that the first year of Form PF reporting costs smaller firms $13,600 and then $4,200 for each annual report thereafter. Not exactly a budget buster for firms managing hundreds of millions of dollars in assets.
True, these costs begin to really add up when all the new rules are considered, but it’s also fair to say that the industry was already headed in a direction that required GPs to significantly enhance their back and middle office operations anyway. Institutional investors, partially emboldened by a rise in negotiating power, began demanding better quality reporting, transparency and compliance.
In fact, in some instances, regulation is driving more LP interest in the asset class. Recent research from Crestbridge for instance found that AIFMD is easing concerns amongst German LPs that alternative strategy such as private equity might lack regulatory oversight. Equally interesting is the fact that new funds are being formed at a faster clip today than in 2012, which suggests the compliance costs aren’t deterring firms from braving the fundraising trail.
None of this is to say that compliance isn’t a tough challenge for today’s private investment firms. But fears that the rule makers would end up stopping the music altogether turn out to have been overblown. The industry is coping after all, and in some areas is looking more accessible to investors than before. As trends go, this one continuing would be welcome.
What’s your take? Drop pfm editor Nicholas Donato a line at nicholas.d@peimedia to share your views on the current regulatory environment.