Prudent fund managers will need to find creative and differentiated ways of generating value if they hope to deliver strong returns to their investors.
Like many other facets of the financial services industry, the private equity (PE) asset class has endured a turbulent and difficult period since the onset of the financial crisis. Critics of the industry were quick to colour the PE space as a den of iniquity, a place for vultures and destroyers of jobs. In recent years, the sector has been required to comply with an increasingly tight set of regulatory requirements.
Regulation in the PE industry has been stringent and free flowing. There has been a plethora of regulation and legislation handed down to PE over the last decade or so, as Johan Terblanche, a partner at Dechert LLP, explains. “The industry has seen significant increases in regulatory and compliance burdens and has adapted well following a relatively slow start,” he says. “Most PE houses understand that they need to adapt quickly. They have allocated extra resources to the regulatory and compliance functions and have improved the level of transparency and reporting to investors, not only to comply with mandatory regulatory requirements, but often also in an effort to meet investor requirements. In addition to great strides made in transparency generally, the level of detail and disclosure in relation to valuation and allocation of expenses have increased in particular, fuelled by the SEC and other regulators’ focus on these items and the increased use of co-investments and managed accounts.”
The asset class has seen a number of changes to the pre-existing regulatory and legislative landscape, with measures such as FATCA, AIFMD and MiFID all having a substantial impact. Such changes are far from over, as there is likely to be more in the pipelines for PE firms. Accordingly, the industry will be required to demonstrate agility and dynamism to quickly and effectively adapt going forward.
Despite the ever stringent regulatory requirements being foisted upon the PE industry, the sector has responded admirably of late, more than keeping its head above water. Its robustness can be seen in recent global deal activity. Transactions in the PE industry climbed considerably in 2014, with deal values reaching $3.5 trillion, an increase of 47 percent on 2013, according to Thomson Reuters. PE exit volumes also reached record levels in 2014.