Q&A: Regulatory reality

New regulations in the US and Europe have general partners rethinking everything from how to communicate with current and prospective investors to how to budget for extra compliance costs. PEM speaks with Walkers Global partner and co-head of the private equity group Rolf Lindsay to assess the impact.

The Alternative Investment Fund Managers directive came into force this week and EU member states will have until July 2013 to work the directive’s provisions into their own legal frameworks.

The AIFM directive imposes new rules on general partners’ pay, fund transparency, restrictions on asset stripping, but most notably, the rules will allow non-EU funds marketing access to the 27-member bloc.

Meanwhile, in the US, SEC registration will give the government more oversight over managers, including the right to run inspections and forces firms to hire or designate a compliance officer.

Rolf Lindsay, a partner and co-head of the private equity group in the Cayman Islands office of Walkers Global, talks to PEM about what the US and European regulatory changes could mean for private equity fund managers.

What are your views on the current regulatory environment in the US and Europe?

A couple of years ago when the world went horribly wrong, the rhetoric was reasonably aggressive. But, the nature of that rhetoric has changed. The focus now is on things that actually matter like transparency and the importance of sharing information. Those tend to be the regulatory issues that people are focused on.

How are clients reacting to new regulations?

Many have accepted them straightaway provided that the regulations are sensible and focus on transparency and systemic risk. It’s better from an industry perspective.

Are growing costs a concern for clients?

In the US there is increased cost for entering into the marketplace. People are concerned about anti-fraud regulations and being compliant. The Alternative Investment Fund Managers directive brings an additional cost of doing business in Europe. Some managers believe that it doesn’t make sense for them to raise money in the European market and that’s a shame. It’s ideal not to have their investor base concentrated in any particular market.

Are there other areas where cost is a concern?

Personnel. Private equity has been leanly structured with a focus on dealmakers. Now there is increased focus on regulatory and compliance teams as well. GPs are spending a lot of money on legal fees to get registered with the SEC. But, firms are looking beyond registration. They are employing more people in their compliance departments and legal departments.

How are investors reacting to increased regulation?

Investors are particularly welcoming of the application of regulation. It’s an extra layer of comfort as they are investing significant money. It hasn’t impacted fund terms a great deal, but it does take longer to raise capital than before.

Are there any advantages to having more regulations on the books?

There is a sense in which greater regulation is something of a red herring. In the big world of private equity, there is a far greater concentration in institutional funds. The most significant players were regulated in any event. For some fund managers there are significant benefits. There are more specialised funds than there used to be. GPs are looking to now raise specialist funds at a particular size and raise a greater number of funds than before.