Friday Letter Unintended Consequences

The proposed European Directive on Alternative Investment Fund Managers is, theoretically, about increasing transparency.

But fear of running afoul of its various disclosure requirements may have the unintended consequence of making some private equity managers more opaque, as well as putting up impediments to a proper dialogue between GPs and LPs.

For example, the Directive lays out rules that dictate the way firms must communicate consistent messages to both employees and investors. What may have once been a candid meeting between GP and LP might become a stilted conversation in which the GP pauses to remember if the exact same details have been shared with the junior associates back in the office.

“The concern is that there will be a tendency . . . to be much more cautious about the information that is disclosed to investors,” Dechert partner Adam Levin told sister news service Private Equity Manager. “Perhaps to stop themselves from being punished for being in breach of the regulations [GPs] will be inclined to say, 'Well, actually this is all we're prepared to say'.”

Contrary to the view of private equity as a “secretive” asset class in which fat cats silently strip and flip their prey, the asset class is actually one in which investor requests for information are often met with alacrity and precision by mindful GPs. Compare that to the highly regulated public markets, in which shareholders are presented with monolithic and uniform investor communications materials but otherwise shielded from the internal workings of the issuer.

Since private equity is already off limits to “unsophisticated” investors, it should by definition be a market in which partners freely exchange information without the fear that Big Brother will hand out penalties for misspeaking.