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Private capital managers across the globe have been on the receiving end of expanding rules and transparency expectations from regulatory bodies. But as regulatory attention in the private markets picks up, the effects are unlikely to stop with managers – institutional investors participating in the private capital sector could also have their own requirements passed down to them by regulators, if they haven’t experienced them already.
As large investors continue to turn to private markets, they cannot reasonably expect regulatory attention to slow. So, in counting on growing alternatives allocations, investors will benefit from investing in the technology that will empower them to gain a deeper understanding of their portfolios through private equity analytics and benchmarking tools.
A core element driving regulators’ increased scrutiny of private markets is the sheer size and growth of the industry. According to Morgan Stanley, the private capital industry reached $7.4 trillion at the end of 2020, and is expected to hit $13 trillion by 2025. Its size and speed of growth have reached the point that regulators feel increased pressure to take a more active role in overseeing it.
Another factor driving increased regulatory attention to private markets is the growing awareness and embrace of ESG in private equity. ESG requires thorough transparency from all parties in the investing space, especially in order to avoid greenwashed products and practices. Working within an inherently non-transparent asset class, private capital managers and investors may be arriving at a crossroads in terms of keeping pace with the current ESG movement while also finding a way to offer the data insight that regulators are moving toward requiring.
Different regions’ regulatory authorities are at differing points of implementing legal frameworks around private fund management and investing. However, the signs in Europe and the US in particular point to creating guardrails around this rapidly expanding asset class.
The EU has enacted several different regulatory frameworks affecting private fund managers, such as AIFMD, to regulate alternative investment funds specifically, as well as the Sustainable Financial Disclosure Regulation (SFDR) and Taxonomy Regulation, aimed at gaining transparency from asset managers around their ESG-branded investment products.
As of now, few of their policies zero in on the investors participating in the market – however, in 2020, the EU amended IORP II, also known as its Pension Directive, to require pension funds to disclose if and how they take ESG considerations into account in their portfolios. For pension funds who do so, having the private fund data easily on hand to report on may pose a challenge.
Insurers as a class of institutional investors have also seen developments in their own private fund investment rules. In July 2021, Italy’s Institute for the Supervision of Insurance issued a letter further enforcing an element of the EU’s Solvency II, requiring insurers investing in illiquid assets to comply with the following requirements:
While this rule applies to only a specific category of institutional investors participating in the private markets, it could be indicative of what other categories of investors may begin to see applied to them – the responsibility of independently assessing the risks and quality of asset valuation of their individual private fund investments.
Under the guidance of SEC chairman Gary Gensler starting in 2021, new American regulatory attention turned to the private markets and to ESG. Like in Europe, much of that attention is focused on managers rather than investors.
In January 2022, the SEC issued its second-ever risk alert directed at private funds, highlighting the need for better transparency surrounding disclosures, advertising, and due diligence. To accompany the alert, the Commission also published a collection of proposed rules and changes to Form PF.
However, large institutional investors participating in the private capital space would do well to take note of Gensler’s reminder of the responsibility to the common Americans that private capital investors tend to support, including in a speech to the Institutional Limited Partner Association (ILPA) in November 2021.
“Who are those limited partners? Sometimes, they’re wealthy individuals. Often, though, they’re retirement plans, like state government pension plans. They’re non-profit and university endowments. The people behind those funds and endowments often are teachers, firefighters, municipal workers, students, and professors.”
SEC Chairman Gary Gensler in a speech to ILPA, November 10, 2021
Gensler’s focus on the citizens behind institutional investors suggests that even though fund managers are the ones asked to make changes to their reporting, their limited partners are also under the eye of the SEC as it takes a closer look at private markets.
Requirements on institutional investors investing in private markets are likely to come down in some shape or form eventually. As discussed, Europe has already begun to see investor requirements roll out, and investors will want to be proactively prepared with systems and processes already in place, rather than reactively scrambling to adjust their operations and tools to comply with requirements.
As regulations shift and advance, investors will be asked to have a strong understanding of the real-time state of their private investment portfolios – from allocations to portfolio company details to valuations. Allvue can empower institutional investors to gain confidence surrounding their portfolio metrics and asset valuations, ensuring that they are fair and aligned, as opposed to solely relying on third-party sources.
Allvue’s Limited Partner solution set is built to serve as a single source of truth for private capital investors needing to understand their portfolios in real time. Our solutions enable investors to track, analyze, and amalgamate multiple alternatives asset classes from inception to maturity as well as slice and dice customized KPIs across their full private portfolios.
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