Private equity firms have entered a new era in their evolution. Regulation is increasing and tax authorities are becoming more assertive. Creating value requires continued active management of portfolio companies. Firms need to re-evaluate their investment strategies, compliance functions and holding structures.
As private equity firms have grown from small partnerships to global organisations, so their control and tax risks have grown. Today, tax authorities are challenging long-established holding structures. Private equity managers need to institutionalise their approach to these amplified risks. Institutional investors in private equity require tax certainty.
Creating value in the current economic environment is difficult. Private equity firms have to generate sustainable EBIT growth in portfolio companies and adapt to investing in emerging markets, as well ensuring an awareness of responsible investing. Many also have to manage existing, under-performing portfolio companies. Do you have the necessary expertise? With debt finance in shorter supply, how will you finance your acquisitions? What does it take to achieve a profitable exit?
The alternative asset management industry, including private equity, is facing increased regulation. The Private Fund Investment Advisers Registration Act in the US and the Alternative Investment Fund Managers Directive in Europe are increasing the burden of compliance. At the same time, regulators are increasing their expectations of compliance programmes. Managers need to spend time planning and preparing. Asset managers should carefully consider the impact of such regulation on the organisation and business models.
With carried interest under pressure, HR professionals have to decide how to redefine the overall compensation offering, taking into account criticism from shareholders, regulators and the public over ‘excessive’ incentive outcomes. Regulation is also demanding increased transparency in this regard.
Investors are demanding greater transparency on valuation techniques and FAS 157 is increasingly being used as a lever to challenge managers, asking them to explain the basis of processes and calculations such as fair value. Can you articulate the processes and calculations you use?
Faced with greater demands for transparency and a need to mitigate the operational risks, alternative asset managers are developing new operating models. These involve the entire infrastructure, including people, processes, technology, data and organisational design.