In our recent research study 'Private Equity: Where Challenges Meet Opportunities', regulation and transparency were singled out by a large number of respondents as key factors having an impact on the private equity industry.
Here Gulsey Torenli, Director at Vistra in New York responds to some key questions around the challenges posed by regulation and transparency, and how matters may play out in the near future.
Looking at the trends in private equity which are changing and influencing investor behaviour, 63% of respondents to the survey cited increasing regulation and 59% increasing transparency as key factors. What was your reaction to these figures?
It didn't come as a surprise to be honest. As far as regulation is concerned, you only have to look at everything that has been introduced in the last decade to see how the industry has been affected. From global and regional rules, such as GDPR and AIFMD, to tax regulations on a domestic level, GPs are constantly having to get their heads around what is happening – and there is more regulation set to come in the next 12 to 24 months.
As for transparency, I'm surprised the figures weren't higher as it's a challenging and constantly shifting landscape. I think it's to be expected that some respondents would come back and say that GPs aren't as transparent as they should be. On the flip side, it could be argued that because the figure wasn't higher, GPs might actually be managing to be responsive to LP needs.
So how have the changes in regulation actually affected the industry in real terms?
It's tricky to even attempt to summarise the overall impact of regulation on private equity in just one article. It has certainly had an impact on costs – the higher the volume of regulation, the higher the cost of ensuring compliance, largely because of the number of people you need to have in place. GPs, especially, are cost-conscious at the best of times, but when it comes to regulation there are no short cuts, or you face the consequences by way of penalties, fines or sanctions.
Owing to GPs looking to manage those increased costs, we've definitely seen a move towards certain functions being more heavily outsourced, as managers look to take advantage of the expertise that already exists in the market.
Yet as you say, there's more regulation to come – and with 63% of respondents in the survey saying that regulation will be more complicated and difficult to meet, that surely presents quite a challenging picture?
Most definitely – especially when you consider that 44% also said that the level of regulation is already too costly and restrictive in allowing them to operate effectively. The current and ongoing state of play in regulation is definitely reshaping the way in which the industry as a whole, and fund managers themselves are operating.
Significantly, regulation is also shaping the way service providers such as Vistra operate. Our business looks very different now to how it did 10 years ago. And you only need to look at the boom in fund administrators to see how the industry more broadly has developed.
With all of this in mind, just what are your clients saying to you about regulation? What are their concerns?
Making sure they are compliant and having the systems in place to ensure that happens are definitely high on the agenda. A lot of the time, our clients want to know what the overall impact on them and their funds will be from any given piece of regulation – and that helps them make an informed decision on whether they would like to adopt it early on or prefer to adopt it later when it is actually implemented.
We regularly hear understandable concerns around technology and cybersecurity – and clients seek reassurances that their data is as protected as it can possibly be. They want guarantees that we are absolutely on top of the latest regulatory developments and how their business will or may be impacted.
Do you find that transparency is something of a different beast? Regulation is more clear-cut – the rules are laid down and you have to follow them – whereas transparency is a much broader church. As such, is transparency a bigger challenge?
I'd agree with that, yes. With regulation, the rules are clear and you either comply or you don't – and if you don't there are penalties for non-adherence. GPs are far more conscious of those regulations, I would say. But when it comes to transparency or 'soft' regulation, there can be more of a push back.
Let's take the ILPA guidelines as a prime example. Despite being launched years ago – and having revisions in 2011 and 2019 – only 32% of respondents in our survey said that they were fully compliant, with others facing a range of barriers to compliance. Part of the problem here may be the way in which the guidelines have developed.
What ILPA set out to do is very laudable, beginning with reporting and best practice around capital calls, distribution notice templates and fee schedules, for instance. As they started to move forward, it's arguable that the information they are requesting is too demanding. Just last year they introduced new reporting requirements, and GPs, who are already under a significant regulatory burden, are pushing back.
That said, as transparency becomes increasingly expected and possibly mandated, they may not have much choice but to comply. Investors, such as pension funds, are going to want the fee template every quarter, for instance. With a lot of GPs doing ILPA reporting manually – which is time consuming, and therefore not cost-effective – it wouldn't surprise me if there was an increase in outsourcing to providers such as Vistra to help manage the process.
Because regulation and transparency requirements are constantly evolving – is it near-impossible for the industry to stay on top of it?
It's a challenge, that's for certain. If you're a GP running your business in-house, the sheer number of people you need to hire to make sure you are compliant in all of your regions can be monumental in itself. And you'd need to make sure your senior people attend all the relevant conferences to stay current with industry developments.
So, with this complex landscape in mind, just what role is Vistra playing in easing the load for its clients?
First and foremost, we can bring a level of expertise no matter what service a client chooses to take advantage of – our people have their fingers on the pulse of the industry and stay up-to-date with all regulatory developments. We're always talking to auditors, tax advisors and attorneys, and we're always attending industry conferences, so we know what is going on. We are able to make recommendations, so that our clients can make informed decisions.
Importantly, we are able to take care of a large percentage of the back-office work, so that the GPs can focus on what matters most to them – fundraising, managing their funds and building or maintaining relationships with their investors.
And how do you see demand for your services playing out in the next 12-24 months?
I think we are expecting an uptick in accounting and investor services, and the same goes for compliance around GDPR, anti-money laundering and Know Your Customer requirements, as well as a swathe of new tax legislation coming in. What's more, our survey showed that a lot of GPs are finding that investors – particularly large institutional investors – are demanding the use of third-party providers for a range of functions.
While this may mean we are kept busy, we are always looking forward, anticipating how regulation will impact on our clients and the industry more broadly, so that we can ensure we have the right services in place.
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