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Beating regulation risks

FACTA has gone into effect and the AIFMD compliance deadline is right around the corner - all of which secondaries firms must be alive to.

Alternative investment firms  are becoming more concerned over risks caused by new regulation, in particular the FACTA and AIFMD guidelines. The latter went into effect earlier this month and the former will force compliance on non-EU alternative investment managers on 22 July.

The new regulations “absolutely” apply to secondaries as well, according to Lee Gardella, managing director and head of risk management at fund of funds Adveq.

Lee Gardella
Lee Gardella

“Risk management is prevalent in both groups, even though there are obviously different elements to a secondaries business, versus the primary business,” Gardella said.

Each regulation also has a different effect. One US-based secondaries general partner explained FACTA applies to all alternative fund managers, while AIFMD is more complex for large buyout firms and requires “one less step for secondaries”.

According to a June 2014 study published by the London Business School’s Coller Institute and private equity firm Adveq, about 89 percent of private equity GPs are concerned about the new risks caused by regulation and 72 percent of  GPs indicated the regulation could result in a decline in capital raising in certain regions.

The study also revealed a majority of private equity firms rank risk management as a high priority when engaging in investments and as many as 60 percent of GPs have established additional compliance groups to deal with regulations. However, few GPs see any marginal benefits to the new regulations and claim the guidelines lack clarity.

“I don’t recall any conversations I have had where industry peers have said ‘oh we’re really happy regulators have made this change’,” the US secondaries GP said.

Furthermore, the regulation risk concerns aren’t raising industry standards for risk management, according to the study.

“I think the regulatory regime is getting more complicated therefore the risk management processes to have become more complicated, but I don’t know if that’s raising industry standards,” the GP said.

The study advises GPs to engage more with watchdogs and LPs about risk management so GPs know what investors want and regulators understand how new rules fit in with a GP’s practice.

Read more about the report here.