Private markets fund managers should embrace regulation as a catalyst for growth

By Howard Nurtman

There’s a revolution going on that’s neither technology-related, nor based in any of the world’s geopolitical hotspots. It’s an investment revolution, driven by more and more investors seeking exposure to global private assets.

The sheer volume of growth is simply breathtaking, but like most ‘overnight successes’, this has been a long time coming.

The growth of global private assets

Global assets in private markets funds have now reached $14.046 trillion, four times the $3.464 trillion in 2015, according to data from Ocorian’s Global Asset Monitor. 

While infrastructure focused funds have been something of a poster child for private markets coverage – it has grown by more than 500% to $1.351 trillion over the past decade – it really isn’t doing the heavy lifting in this area.

Assets in private debt and private equity funds have both mushroomed, each growing by more than 400% over the same period. By contrast, real estate is ‘only’ about two and a half times its 2015 size.

But it is private equity that leads the charge, making up more than 70% of all global assets in private market funds, having almost broken the £10 trillion threshold ($9.917 trillion).

Patience seeking stability

The reason for this is simple. Demand for private financing has grown as it has proved a more flexible – and often faster – alternative to traditional bank lending in recent years, particularly for corporate borrowers. The number of privately held companies is rising significantly compared to publicly listed ones, driving the growth.

Asset valuations are supported by moderate real yields, a steepening yield curve, and credit markets that facilitate capital flows into private assets.

That growth has been met by demand from long term, ‘patient’ investors such as pension funds, family offices and insurance companies who seek stable returns over a longer investment horizon.

Higher demand, but slower capital raising

U.S. private equity-based managers remain bullish about continued growth; almost two-thirds (60%) say that raising capital is getting harder, despite the rocketing demand.

The main reason for delays is increased levels of due diligence by investors. Around 50% of the private equity firms surveyed said that investors are more risk-averse and that more than half of them have capital constraints that limit their private market allocations.

There are numerous regulatory hurdles to be overcome, too. U.S. private equity general partners (GPs) and limited partners (LPs) have a number of imminent concerns. They don’t know if they will have to overhaul reporting and investor-treatment processes. It is also unclear how far retirement plan access will expand, or whether future tax and antitrust policy will have a material impact on the way deals are struck.

Regulatory uncertainty

Industry professionals are right to be concerned about regulatory complexity and how more regulation on fund structuring, capital raising, and long-term planning imposes greater restrictions and increases the burden of compliance.

Uncertainty is always going to cause sleepless nights. While there is a dominant deregulatory mindset in the U.S. as the SEC chair, Paul Atkins, dismantles what the Trump administration considers to be excessive and obstructive business practice, most expect to see more regulatory creep.

Data from Ocorian shows that 85% of private equity professionals anticipate greater levels of regulation, while 88% expect there to be more industry restrictions and fines.

Four out of five (80%) anticipate spending more time on compliance failures.

But while regulation may present operational obstacles, it offers investors protection and is a powerful way to build investor trust and credibility – particularly among institutional investors.

Working with regulation has its advantages

Investors want to see their managers actively walking the compliance and governance tightrope. Managers who embrace governance innovations, improved transparency and deliver policies – such as those governing the use of artificial intelligence (AI) – may gain competitive advantage.

This is important as an Ocorian survey found that family office and pension funds plan to increase their allocations by 17.8% and 20% respectively over the next two years.

Nobody does it better

We all know how much time, effort and resource goes into delivering transparency for clients. This is exactly where outsourcing specialists can provide expertise in navigating regulatory complexities and compliance requirements.

Outsourcers help streamline investor services, fund administration, and reporting functions quickly and efficiently, giving investment companies the information they need to support enhanced due diligence, governance monitoring and data management.

Leveraging specialist support

Intelligent, strategic use of outsourcing perfectly aligns with an industry that believes in working with those best qualified to solve a problem or deliver a solution.

Managers who rely on external providers for delivering scale and meeting regulatory demands have not abdicated any responsibilities but identified where someone can do something better so they can double down on giving their clients the best possible service.

By embracing regulation and allowing third parties to do the more specialized, time consuming or just difficult work, managers can focus more on making investment decisions and managing the business while ensuring each regulatory hurdle is cleared.