Companies in the private equity industry have been evolving to meet a changing regulatory landscape after the 2010 Dodd-Frank Act authorized greater oversight of money managers. Many private equity firms found themselves under regulatory scrutiny for the first time. In 2014, the SEC reported findings of “violations of law or material weaknesses in controls over 50% of the time” with regard to how fees and expenses are handled by PE funds.
Adding headcount to meet regulatory scrutiny, such as legal and compliance, to address the changes hasn’t been a perfect approach. “Legal and compliance is our fastest growing part of the firm by far,” Blackstone COO Tony James said in 2014. “We’ve been dealing with this for a long, long time, it’s just there’s more and more and more of it, in more and more jurisdictions.” Personnel growth, and more specifically, developing the right talent and flexible skill sets to correspond with needs, has raised operational stakes for the industry.
Having a larger headcount in legal and compliance proved insufficient when the SEC later cracked down and charged Blackstone, Apollo Global Management, and Kohlberg Kravis & Roberts of disclosure lapses and conflicts of interest, among other violations. Between 2015 and 2016, record settlements totaling in excess of $120 million from the three industry leaders prompted already enhanced disclosure and compliance practices to become less opaque—and quickly. The SEC stated it agreed to Apollo’s $52.8 million settlement offer in part because “Apollo was extremely prompt and responsive in addressing staff inquiries.” Likewise, the SEC noted that determining factors in accepting Blackstone’s $39 million settlement were voluntary and prompt provision of documents and cooperation.
New regulatory demands also require that PE funds and their managers have the talent and skill sets necessary to provide transparent reporting and to help avoid risk. CFOs, financial controllers, and investor relation professionals are tasked with accurate financial reporting. The sheer volume of financial data in today’s industry transforms a straightforward set of responsibilities into roles with unprecedented pressures and demands.
Ideally, CFOs adapting to the industry climate change would be able to construct their own team to address specific needs. This means appointing and retaining a highly competent financial controller and specialists with hybrid experience and particular skill sets. However, the vast majority of CFOs walk onto pre-existing teams and simply do not have the resources to increase headcount, train personnel, or develop new talent to meet heightened standards of transparency and compliance.
Industry regulation has been on the horizon for some time and it isn’t just the big funds that need be on alert. Mid-market PE companies looking to quickly grow should be prepared and bolster their back office personnel sooner rather than later. Because talent is scarce and resources are finite, outsourcing to a third-party fund administrator has become a growing and cost-effective industry trend.
NES Financial provides expertise in fund mechanics, regulatory requirements, and asset-class specific issues. Our scalable solutions can help fund managers stretch limited resources and strategically direct them while still meeting complex and evolving operational and reporting needs.
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