On that front, she worked with law firm Pepper Hamilton LLP to author a study, “Fees and Expenses 2014: A PFM Benchmarking Survey,” which was presented at the Small Business Investor Alliance (SBIA) Northeast Private Equity Conference on Jan. 20.
Anquillare said her experience working with firms with fund sizes ranging from $100 million to $300 million and up led her to conclude that regulatory compliance efforts often draw resources away from deal-making for firms in the lower middle market. She estimated the average middle-market firm could be losing out on one to two deals a year because of the current regulatory burden.
“They’ve all put in email and trade monitoring systems, but that’s the tip of the iceberg,” Anquillare said. “They’ll have to expand their knowledge and investments on the information technology side to maintain compliance. And they may have to expand personnel.”
At smaller firms, the duties of a chief compliance officer are often handled by the CFO, who in turn may delegate some human resources and management responsibilities to a partner.
“It’s a trickle down effect,” Anquillare said. “It’ll take several years to go through it all (compliance and registration requirements). It’ll cost them time. And time is deals.”
PEF Services recommends smaller clients slowly build up resources for compliance rather than trying to immediately match the richer resources of big private equity firms.
“We’ve counselled the smaller shops that you can’t drive up to regulators in an expensive Cadillac,” she said. “You’re better off showing what you do on fees and expenses and how you got there. You can’t do the same thing as Carlyle Group or promise to do what Carlyle is doing, for example.”
After adding 11 people to its staff in 2014, PEF continues to hire accountants and IT professionals. The company has expanded its product set to include more detailed fund performance and deal activity metrics through a bulked-up database. Anquillare expects to see more growth from new firms.
“Even though you have risks on the horizon, we still see so many great fund managers coming out and doing spinouts,” she said. “We have fund managers going to friends and family to step into the water, and a lot of institutional investors are interested in the small-fund market.”
Along with expanding her own firm, Anquillare continues to advocate for cooperation among different types of alternative managers to strengthen the industry’s hand with regulators.
“There have been questions about whether there is any value in any of this regulation,” she said. “The consensus is that, yes, the industry needed a wake-up call. We need to do things better on documenting, standardizing and communicating. We don’t need to be regulated out of existence, but we need to do some things better. The conversation needs to include smaller firms. I think we’re headed that way.”
By Steve Gelsi