Regulatory developments are a particular concern to the private equity industry, but there is little managers can do when it comes to the upcoming Alternative Investment Fund Managers Directive, said David Currie, partner and chief executive of SL Capital Partners.
“As for AIFM, we’re stuck with it,” he said. “It’s going to happen.”
Faced with the regulatory reality, managers are still waiting for clarification on how new rules will impact how products can be sold.
“Will regulators try to impose terms? Will regulation create a barrier to negotiate with clients?” asked Currie. “There’s a misunderstanding that the PPM is the definitive product whereas the partnership agreement is really what sets the rules for the fund. Investors usually want to negotiate some of the terms of the partnership agreement,” he said.
The genesis of new regulations can be traced to some high profile individuals that were burned, said Currie. “Some European politicians have been encouraged to propose regulations that protect against systemic risk. I don’t see private equity presenting that risk.”
For many private equity managers the costs associated with compliance is daunting.
“Under AIFM, there’s going to be extra cost with no benefit. It may lead some managers to think they won’t sell in Europe.”
New regulation will also be felt at the investor level, he said. “Regulation also hampers clients. There are some that think added regulation will bring too much hassle and opportunity will be more limited.
However, SL Capital, the private equity fund of funds division of financial services giant Standard Life, is in a good position as the firm is acclimated to a regulatory environment. “We are registered with the FSA and SEC so we’re accustomed to operating in that type of environment. Others will not be able to cope with it.”
In addition to changes in the regulatory environment, negotiations surrounding terms and conditions have also changed extensively over the past few years, said Currie.
“Frankly in the European market the 2 and 20 fee structure is not the case for funds of more than €750 million. The 2 percent standard fee has not been standard for some time,” said Currie. “Depending on the size of the fund, the management fee is substantially less and following the investment period sometimes reduced by half.”
There are also a number of funds requesting an extension in the investment period, said Currie. “It’s usually for a 12-month time period,” he said. “And if that’s the situation, you don’t want them to feel pressure to deploy capital, especially recklessly.”
And competitive terms are a positive sign: “We’re always pressing for ways to improve the terms for LPs”.