Private equity firms do not believe that regulation is raising industry standards for risk management, according to a new study of general partners. The research was conducted by the London Business School’s Coller Institute and supported by Adveq.
Private equity firms do not believe that regulation is raising industry standards for risk management, according to a new study of general partners (GPs) conducted by the London Business School’s Coller Institute and supported by Adveq, the globally active private equity investor.
Despite this scepticism, the study showed that risk management remains a key focus for private equity firms. Just 4% of respondents to the survey said that they do not have any form of risk management policy in place, while 83% ranked risk management as ‘high’ or ‘very high’ on their list of concerns when engaging in investments.
This is reflected in the fact the majority of private equity fund managers tend to give responsibility for risk management to very senior personnel, either their chief risk officer, managing partner, board, or an executive risk management committee.
However, the research shows that 98% of private equity fund managers are unsure of the benefits of increased regulation. New rules are seen as lacking clarity, with 58% of GPs involved in the survey stating that they believe guidelines are unclear.
Of GPs involved in the research, 89% said that they are concerned about new risks caused by regulation. The Alternative Investment Fund Management Directive (AIFMD) and Foreign Account Tax Compliance Act (FATCA) were both noted as of particular worry, with 72% of respondents highlighting that such legislation could result in GPs pulling back from raising capital in certain geographies.
Florin Vasvari, Associate Professor of Accounting, London Business School and fellow of the Coller Institute, said:
“Until recently the private equity industry has been largely self-regulated, but despite this GPs’ risk management functions are well developed. New legislation may aim to formalise and standardise risk management in order to protect investors, but there appears to be some misalignment between what regulators believe private equity investors need and what they actually require.
“For example, many GPs do not report on their efforts to mitigate operational risks, but in reality not all investors would expect or need this level of disclosure.”
Sven Lidén, Managing Director and CEO, Adveq, said:
“While regulation will shape the private equity industry for years to come, it may not necessarily be in the ways that the regulators originally intended. It is important for an open dialogue to occur between industry participants in order to ensure the best interests of the end user are served.”
“Regulatory reform presents an ideal opportunity for GPs to engage more with watchdogs and limited partners about important topics like risk management. It is vital for fund managers to know what investors want, but it is also equally important for regulators to understand how new rules can fit in with how the industry works in practice.”
– ENDS –
Notes to editors
About ‘Risk Management Practices at Private Equity Firms’
‘Risk Management Practices at Private Equity Firms’ was co-authored by Eli Talmor and Florin Vasvari at London Business School’s Coller Institute of Private Equity, supported by Adveq, the globally active private markets investor.
The findings were based upon a series of in-depth interviews conducted with private equity fund managers and represent the first deeper academic inquiry into the subject matter across the full range of fund types. Views were collected from GPs based in Europe, North America, Asia, Africa and the Middle East.
The Coller Institute of Private Equity has as its primary focus the establishment of a world-renowned research centre and debating forum on private equity.
To download a copy of the full research report, please visit: www.collerinstitute.com
About London Business School
London Business School’s vision is to have a profound impact on the way the world does business. The School (www.london.edu) is consistently ranked among the best in the world for its programmes. It was ranked number one internationally for the full-time MBA programme*.
The School’s faculty, from over 30 countries, is grouped into seven subject areas – Accounting; Economics; Finance; Management Science and Operations; Marketing; Organisational Behaviour; and Strategy and Entrepreneurship.
The award-winning** Executive Education team offers a portfolio of over 25 open programmes as well as custom-designed programmes developed to meet the specific needs of individuals and their organisation. Annually, over 9,000 participants attend executive programmes that are led by many of the world’s leading business thinkers.
* 2013 Forbes international MBA ranking, 2012 Bloomberg BusinessWeek international MBA ranking and Financial Times MBA 2009, 2010 and 2011 rankings
**London Business School was recently awarded the 2013 EFMD Excellence in Practice Award for its 10-year partnership with Danone.
Founded in 1997, Adveq is a leading asset manager investing in private equity and real assets globally. It offers specialized investment solutions which allow the firm’s clients to access select private market segments through primary, secondary and co-investments.
Adveq’s client base comprises institutional investors such as pension funds, insurance companies, family offices and other financial institutions located in Europe, North America and the Asia-Pacific region. Many of Adveq’s investors are repeat, long-term clients with whom the firm has developed a role as a trusted partner for private market investing.
Adveq has offices in Zurich, Frankfurt, London, New York, Beijing, Shanghai, and Hong Kong, as well as an agent relationship in Sydney.