What’s got GPs worried?

Are incoming regulations weighing heavily on fund managers’ minds (and draining their time and resources)? Or do they find other issues more pressing?

Last week, two surveys on this topic released reached conflicting conclusions. The first, by fund administrator SEI, discovered only 10 percent of surveyed fund managers believe addressing new regulatory requirements will be their biggest challenge over the next 12 to 18 months. Economic uncertainty, identifying quality deal opportunities and investor hesitancy were all cited as bigger concerns.

International tax reporting requirements under the Foreign Account Tax Compliance Act (FATCA) in the US and sweeping new fund regulations as part of the Alternative Investment Fund Managers directive (AIFM) in Europe, for example, are just two reasons why one might expect regulatory changes to place in at least the top three challenges GPs cited. Fund managers have always dealt with the ebb and flow of economic and fundraising cycles but at no other point have they experienced a regulatory overhaul of this magnitude.

Having bigger fish to fry is one thing, but GPs also say new regulations will not be a cost burden on their firms. The SEI study revealed just over 70 percent of fund managers believe addressing new regulations will not be significant to their firm’s profitability.

Or perhaps not. According to a separate study from accounting giant KPMG, more than half of private equity executives (51 percent) said complying with new regulatory standards is a “difficult, time consuming process”, – an 8 percent increase from a similar study conducted by KPMG last year.

One might think GPs’ collective psyches were suffering from a bout of cognitive dissonance based on the two surveys. But a more reasonable explanation is that while regulatory concerns may not be at the forefront of GPs’ minds, they simultaneously understand the seriousness and complexity the rule changes will inevitably introduce to the industry.

It also may have to do with which team members within a private equity firm responded to the survey(s).  The reason compliance officers, lawyers and outside consultants are hired is so GPs can focus on appropriately managing the capital that was committed to their funds . A constant appraisal of the way Dodd-Frank Act will limit their future engagement with banks for instance, distracts from identifying attractive deal opportunities (managers’ greatest current challenge according to SEI) and concentrating on portfolio management.

That is not to say GPs mustn’t be up-to-date on regulatory developments, including the effect they will have on various operations within the private equity firm. Indeed, in many scenarios it will be GPs who will relay these concerns and challenges to the investor community and greater public at large – just like they must be able to explain their firms’ strategies for weathering global economic turmoil.