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Operational challenges reshape private equity terrain

Karen SandsBy Karen Sands on 6 May 2015
Operational challenges reshape private equity terrain

The regulatory requirements of AIFMD and FATCA, as well as critical reporting to investors, are among the most pressing operational challenges that European private equity faces. More than ever, we need people to manage these pressures, and implement and spread best practice across the industry.

Yesterday I was preparing financial filings that meet Singapore standards; tomorrow I will be briefing investors at our annual meeting on how regulatory changes affect our business, and ultimately impact on them. The role of finance director at Hermes GPE means much more than handling accounts and financial statements, it involves steering the company through challenging legislation while meeting the demands and expectations of sophisticated private markets investors. 

European private equity has grown rapidly in recent years, and so has the scrutiny it comes under. Increasingly, our industry needs people who understand regulation and reporting requirements, and know intimately how private equity firms and their investment professionals work. Only that way, can we balance pressures on our businesses with our primary function – delivering great returns to investors.

As an industry, we need to share our knowledge of issues and challenges globally. In doing so, we can implement best practice at our own firms and create a template for all to follow.  That’s why I will be participating in Invest Europe CFO/COO Forum in Brussels in June.

The demand from investors for detailed reports is greater than ever. While we strive for better transparency, we need to strike a balance between the information we can share, and the information that is too sensitive and could negatively impact our businesses, and those that we invest in, if disclosed. At Hermes GPE, our objective is to produce reports that meet all investors’ requirements, whichever country they are in, and whatever vehicle or investment structure they have invested in.

Regulation is another issue. We are still adapting to the reporting requirements arising from the Alternative Investment Fund Managers Directive (AIFMD), and in particular Annex IV. This text requires a private equity manager to report to its domestic supervisor – in Hermes GPE’s case Britain’s Financial Conduct Authority – on matters ranging from investment strategies and markets, to portfolio exposures and concentrations. AIFM regulation is still evolving and must be monitored for any negative impact.

Similarly the Foreign Account Tax Compliance Act (FATCA), which aims to reduce tax avoidance by US institutions and individuals, places a large burden on European fund managers who must report on their US investors to the Internal Revenue Service (IRS). We are assessing the implications and mechanics of this regulation, but the costs for non-compliance are punitive. US investors must withhold 30% of certain payments, including some fees, to foreign financial institutions that do not meet FATCA standards.

Invest Europe has done much to temper regulation and help set industry reporting standards. The CFO/COO Forum will be a critical event for private equity operations professionals who need to understand all the live issues. I look forward to meeting you in Brussels to discuss topics ranging from regulation to investor reporting and more.

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