Kill or cure: regulating the private equity industry
European Commission president Jose-Manuel Barroso has said that the financial crisis means that “no financial player should be exempt from regulation and oversight”. There is a plethora of regulatory reforms which will have a direct impact on private equity, including the Alternative Investment Fund Managers Directive (AIFM Directive), the revised Institutional Limited Partners Association guidelines, Basel III and Solvency II.
Initially the AIFM Directive was thought by many to be a politically motivated reform, hastily cobbled together with little consultation or understanding of the asset class. The backlash that ensued highlighted its inappropriateness and lead to two years of redrafting and more than 1,700 amendments following extensive lobbying by predominantly the French and Germans (despite the UK being home to the most private equity managers in Europe).
The private equity firms that exploited the remarkably easy lending environment during the boom years, and then inoculated themselves from the worst of the pain in the subsequent couple of years, are now sitting on large amounts of capital which in time should be pumped back into the economy. However, a recent survey conducted by Preqin of more than 100 alternative asset managers showed that most believed the directive would drive some firms and their capital out of Europe.
It can be argued that alternative assets were first paraded in front of regulators in 2005 when Franz Müntefering, then Chairman of Germany’s Social Democratic Party, likened buyout firms to the crop-devastating locust. Six years and one financial crisis later, let’s hope the adverse effects of regulation don’t dampen a year that is expected to bring a wave of new commitments, greater fund distributions and increased allocations to private equity.