As part of this , Delano asked nine financial experts about the regulatory topics at the top of their list of priorities for the next 18 months. Here’s what Shanu Sherwani, chief investment officer/deputy CEO at AM Investments and partner at Antwort Capital, had to say:
“The private equity industry faces significant regulatory challenges in the next 18 months. Managers are pressured to streamline their back office functions due to increased regulatory oversight on general partners’ activities and broader macroeconomic uncertainties affecting the sector. Many managers are re-evaluating their approaches to ensure compliance with new ESG regulations, revisions to the Alternative Investment Fund Managers Directive (AIFMD) in Europe and persistent concerns regarding cybersecurity, data privacy, anti-money laundering measures and client verification checks.”
“The regulations in the pipeline are part of a broader push towards transparency, which is a positive development aligned with industry expectations. With further rules on the way, managers can overcome increasing regulatory requirements in three ways: expanding the use of third-party providers, hiring more people and investing in technology for support.”
ESG considerations
“ESG (environmental, social and governance) considerations have become increasingly important in today’s dynamic business environment. What was once a compliance protocol has become a driving force behind investor relations, business strategies and investment decisions. ESG disclosures, which were once in a supporting role, now play a pivotal role in shaping corporate landscapes.”
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“The European Commission’s Sustainable Finance Disclosure Regulation (SFDR) framework classifies fund managers’ products and significantly influences their marketing strategies and operational approaches. Ambiguity is no longer acceptable, and transparency is now necessary. As a result, there is a heightened demand for robust disclosure and monitoring processes, which require skilled in-house personnel or specialised service providers.”
Next wave of regulation: Dora and AIFMD II
Sherwani stated: “There are some significant upcoming changes that fund managers need to be aware of. One of them is the Digital Operational Resilience Act (Dora), a legislation of the EU focusing on tech-oriented business continuity requirements. It emphasises risk management, incident reporting, resilience testing and third-party contracting. It is expected to be in effect by 2025.”
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“Another legislation currently under review is the Alternative Investment Fund Managers Directive (AIFMD II), the latest version of the directive that aims to standardise reporting across member states. AIFMD II also addresses inconsistencies in the existing rules and introduces additional reporting requirements. Its expected effectiveness is around 2025. The fund management industry is also expanding to include a new category of retail investors through wealth management platforms, pension platforms, or independent financial advisers. This requires significant operational adjustments for fund managers from a regulatory standpoint.”
Anti-money laundering
“In the daily operations of back-office functions, maintaining strict adherence to anti-money laundering (AML) and know-your-client (KYC) compliance processes is a significant undertaking which will always be at the forefront of PE funds in the future. This task demands meticulous attention to detail and adherence to stringent timelines. AML compliance remains a paramount concern, particularly in jurisdictions like Luxembourg, where regulators closely scrutinize funds and their managers. Beyond conducting AML checks on investors, these entities must extend these measures to their target investments. So, this will be a significant priority of constant improvement for PE managers, who need to update constantly.”
Staying abreast of the continual updates and refinements to regulatory frameworks poses an ongoing challenge
“Furthermore, staying abreast of the continual updates and refinements to regulatory frameworks poses an ongoing challenge. Regulations implemented two years ago are already being reviewed, indicating a perpetual adjustment cycle. For managers, this means navigating constant modifications to existing rules, which can unexpectedly impact their operational costs and resource allocations for the upcoming year.”
Staffing
Sherwani stated: “Managing back office operations in today’s highly regulated environment can be a challenging task for many private equity managers. They emphasise the need to strategically place skilled personnel within accounting and compliance teams to ensure smooth operations. This requires recruiting individuals with the necessary expertise and placing them in roles that match their strengths. However, geography further complicates this task, as back office functions are primarily concentrated in countries like Luxembourg and Ireland where funds are headquartered. Despite the size of these countries, they have fiercely competitive talent markets, making it exceptionally hard for fund managers to recruit and retain top-tier professionals for in-house positions.”
A discernible trend among fund managers in real assets and private equity is that they increasingly seek comprehensive solutions from service providers, aiming to offload the entire regulatory burden
“One solution to this staffing challenge is outsourcing. By outsourcing, the responsibility shifts to service providers to ensure they possess the necessary talent, agility, and resources to respond swiftly to evolving needs. A discernible trend among fund managers in real assets and private equity is that they increasingly seek comprehensive solutions from service providers, aiming to offload the entire regulatory burden. This strategic partnership yields cost efficiencies and streamlines operations, allowing managers to focus on core activities such as raising capital and managing investments.”
Technology to improve efficiency, accuracy and regulatory compliance
“In addition, managers understand the significance of technology in modernising operations and are investing in advanced solutions to overcome significant data processing challenges and stay updated with compliance regulations. By using technology, they strive to improve efficiency, accuracy and regulatory compliance in their back-office functions, ensuring strong operational frameworks that promote sustainable growth and success.”
Managers should prioritise transparency and compliance, expand their use of third-party providers and invest in technology
Sherwani concluded: “The private equity industry faces multiple regulatory challenges in the next 18 months. To navigate these challenges effectively, managers should prioritise transparency and compliance, expand their use of third-party providers and invest in technology. This will help them ensure regulatory compliance, streamline operations, promote sustainable growth and maintain investor trust in a constantly evolving regulatory environment.”
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