February 24, 2014

Regulation Tops Institutional PE Investors’ Worry List

But survey finds investors have yet to change allocations because of regulatory changes

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Regulation is still the chief concern of institutional investors trying to operate an effective private equity program, according to Preqin, a research firm for the alternative assets industry.

In a December survey of more than 100 institutional investors across the globe, 26% of private equity investors cited regulations as their main challenge. This compared with 31% who expressed the same concern in a Preqin survey last July.

Twenty-two percent each of respondents in the new survey said performance and the economic environment were also concerns.

Preqin noted that the Alternative Investment Fund Managers Directive, which comes into full effect in July, and Solvency II and Basel III farther into the future, will predominantly affect North American and European investors.

These are examples of changing laws around the world that will affect private equity players, Preqin said.

In the U.S., implementation of the Volcker Rule will limit the amount of capital American banks can hold in private equity or hedge funds to no more than 3%.

Preqin said that despite the concerns expressed by private equity investors, the actual effect of recent regulation has been felt by a much smaller number of investors.

The directives, it said, were applicable to only certain types of institutional investors operating in certain geographies. Basel III targets banks, and Solvency II affects EU insurance companies.

So far, only 4% of respondents said they had cut back their private equity allocations, according to the survey. Eight percent said that new industry rule may affect their future allocations.

Uncertainty appears to surround the regulations, which were introduced in 2011–2013. Forty percent of investors surveyed said they were fundamentally unsure whether the changes were beneficial to the private equity industry.

A third of respondents said that the regulations were good for the asset class, and 27% felt they would be detrimental.

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Check out Institutional Investors Flock to Hedge Funds: Deutsche Bank Survey on ThinkAdvisor.

Regulation is still the chief concern of institutional investors trying to operate an effective private equity program, according to a new study by Preqin, a supplier of data, analysis and intelligence services to the alternative assets industry.

In a December survey of more than 100 institutional investors across the globe, 26% of private equity investors cited regulations as their main challenge. This compared with 31% who expressed the same concern in a Preqin survey last July.

Twenty-two percent each of respondents in the new survey said performance and the economic environment were also concerns.

Preqin noted that the Alternative Investment Fund Managers Directive, which comes into full effect in July, and Solvency II and Basel III farther into the future, will predominantly affect North American and European investors.

These are examples of changing laws around the world that will affect private equity players, Preqin said.

In the U.S., implementation of the Volcker Rule will limit the amount of capital American banks can hold in private equity or hedge funds to no more than 3%.

Preqin said that despite the concerns expressed by private equity investors, the actual effect of recent regulation has been felt by a much smaller number of investors.

The directives, it said, were applicable to only certain types of institutional investors operating in certain geographies. Basel III targets banks, and Solvency II affects EU insurance companies.

So far, only 4% of respondents said they had cut back their private equity allocations, according to the survey. Eight percent said that new industry rule may affect their future allocations.

Uncertainty appears to surround the regulations, which were introduced in 2011–2013. Forty percent of investors surveyed said they were fundamentally unsure whether the changes were beneficial to the private equity industry.

A third of respondents said that the regulations were good for the asset class, and 27% felt they would be detrimental.

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