Investor Base: Relentless regulation

The increasing regulatory burden on the private equity industry is being felt in more ways than new guidelines and worrying about the US Securities and Exchange Commission as LPs increasingly rate PE firms by their ability to handle reporting requirements.

A survey by EY in collaboration with Private Equity International found LPs were four times more likely to name reporting as a top area of concern when selecting a PE firm than a year earlier.

While 11 percent of LPs polled said reporting was most important after track record in 2014, that figure increased to 44 percent last year, according to Disruption: Seismic Shifts in the Private Equity Industry.

This shift is being particularly felt by private equity finance teams relying on manual processes, says Scott Zimmerman, EY private equity assurance leader for Americas and one of the study’s authors.

“There are not a lot of sophisticated, integrated systems where information can flow from one piece of the business to the other. Instead there are numerous bridges that have to be walked across, and usually those bridges are spreadsheets,” said Zimmerman. “It’s creating a real burden on finance teams.”

Indeed, 63 percent of the CFOs surveyed said data is the most significant operational challenge they currently face. Investor reporting (31 percent) was the next biggest challenge.

And as private equity funds become more digital, the importance of cybersecurity only grows, says Zimmerman.

While private equity funds are increasing their focus on digital security, only 7 percent of investors said they were satisfied with their fund managers’ current policies. It should be added that most investors did not see cybersecurity as a high risk in current regulatory campaigns, a view not shared by Zimmerman.

“Cyber-threats are a real business risk; the day cybersecurity becomes a top priority is the day one of their funds is directly affected,” he says. “There just needs to be a wake-up call, and it will happen, it's just a matter of when.”