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The boom in private equity has drawn attention to the industry – catching the eye of investors, service providers and, more recently, regulators.
The increase in private equity regulation shouldn’t come as a surprise. Given how substantial the shift in capital from public markets to private ones has been and the inherent opacity of private equity assets, increased political demand for fund accountability and transparency seems a predictable response. It is likely that, as a result, we’ll see more regulation for more private equity firms in more places.
Also unsurprising: that regulation is likely to cause new challenges for private equity firms. So what can firms do to prepare for the evolving regulatory landscape?
In this article, we break down the reasons behind the rise in regulatory activity, explain the challenges that it creates for private equity firms, and explore how better data management can help funds rise to the occasion.
Regulators are turning their attention to private markets due to the sheer size and growth of the industry. According to McKinsey & Co., assets under management in private equity reached $9.8 trillion in July of 2021. For the year 2021, private equity funds raised $1.2 trillion. The McKinsey data show a steady increase in fundraising activity, interrupted only by the financial crisis and the COVID-19 pandemic.
As this money is invested, it becomes too big to ignore. Because private companies don’t need to file information with local regulators or release financial statements, there is less transparency for regulators and policymakers.
In October of 2021, SEC Commissioner Allison Herren Lee discussed how the growth of private markets affected investors and the economy from her perspective as a regulator. She recognized the value of businesses backed by venture capital and private equity, but cited what seems to her to be a key problem: investors, policymakers, and the public know relatively little about these companies when compared to their public counterparts.
“The shift toward private markets in recent decades has brought us back to a familiar crossroads, one at which we must evaluate the opacity of large and important segments of the economy and what that opacity means for investors and our public markets.”
– SEC Commissioner Allison Herren Lee, October 12, 2021
The boom in private equity fundraising coupled with the inherent opacity of alternative investments has, in short, brought renewed regulatory attention to the industry.
With that regulatory attention comes an increased regulatory burden.
Regulation has long been a fact for private funds, as for any investment manager, but meeting these looming regulatory requirements will call for greater agility in managing business processes. The United States has proposed an overhaul of private fund regulations. The EU has increased rules aimed at preventing tax avoidance, and the US has considered changes in the way it taxes partnership earnings. Demand for ESG monitoring is growing in many places, requiring thorough transparency from all parties in the investing space to avoid greenwashed products and practices. Pulling account statements for investors can already be a painful, manual process – creating reports for regulators will only increase the workload.
As regulations shift and advance, fund managers will need a strong understanding of the real-time state of their portfolios. They may be asked to report on performance, economic activity, and ESG factors wherever they or their investors are located. Working within an inherently non-transparent asset class, private capital managers and investors may be challenged to keep pace with changing markets while also offering the data insight that regulators are moving toward requiring.
In order to keep pace with the challenges of this new, increased regulatory environment, private equity managers will have to create streamlined and efficient back-office workflows. Managers handing their accounting and reporting workflows on Excel or outdated legacy platforms have already seen their processes buckle as the business expands and grows in complexity – more regulation will only further increase this burden.
Allvue’s Enterprise Equity solution set is built to serve as a sole source of truth for private equity fund managers needing to understand their portfolios in real time. Our solutions enable managers to track, analyze, and amalgamate multiple alternatives asset classes from inception to maturity as well as slice and dice customized KPIs across their portfolio.
Reach out today to learn how Allvue can help you better manage the evolving regulatory landscape.
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At Allvue, we’re committed to harnessing technology and expertise to tackle the biggest challenges facing the private capital space. Our Resources hub, offering blog articles, whitepapers, case studies, videos, and more, shares industry best practices and reflects the experience and learnings of top Allvue experts and our partners motivated to see this industry continue to grow and thrive.
Our goal is to provide guidance as well as food for thought for anyone interested in the private equity, venture capital, private debt, and public credit spaces – whether you’re learning the fundamentals or getting ready to raise your fifth fund. Many of our articles contain links to trusted third-party resources to support our takes, and all our content is regularly reviewed and updated to keep current with the fast pace of alternative investment innovation.