Private-equity investors brace for tighter regulation

A report released Monday by investment firm Coller Capital shows that private-equity investors sense the asset class faces greater public pressure and will have to accept new regulations on how it operates—including going beyond the rules required by government regulators.

The report by Coller, which invests in secondhand private-equity fund stakes, shows that 59% of private-equity limited partners think that societal pressure will ultimately require the industry to self-regulate, imposing rules on itself that are stricter than government regulations. The remainder think it will be sufficient to comply with formal government regulatory requirements. The report was based on survey responses from 102 investors in private equity globally.

In the U.S.—where regulators have recently floated plans for private-equity rules changes—investors expect government regulatory requirements to rise, the survey shows. Fifty-one percent of limited partners in North America expect more government regulation of private equity in their home market.

It is unclear, however, whether investors view the prospect of new rules as good news. Coller didn’t poll investors’ views on regulation in this survey, but in a similar survey released in June, 70% of investors thought regulatory changes posed a risk to investment returns, up from 43% about six months before. A further 63% in that survey thought changes to tax policy posed a significant risk to returns.

The results suggest conflicts for investors about the recent push to rein in private-equity managers. The industry has been the target of criticism in recent years around issues such as how firm practices affect workers at the companies they buy, and—particularly in the healthcare sector—how they affect customers and patients.

The Institutional Limited Partners Association, a trade group for institutions that invest in the asset class, generally supports increasing the transparency of private-equity funds and the fees they charge, but opposes other restrictions on investors that could reduce financial returns, based on the policy priorities the group released this year. The group said it supported more transparency and standardized expense reporting but opposed new taxes on limited partners or restrictions on the ability to invest around the globe, among other potential changes.

Biden administration officials have said they intend to raise the bar for firms’ conduct. Gary Gensler, the chairman of the Securities and Exchange Commission, said last month that the agency was considering new rules about private-equity firm disclosure, and questioned whether fees charged by asset managers are too high.

“I wonder whether fund investors have enough transparency with respect to [private-equity fund] fees," Mr. Gensler said at a Nov. 10 meeting organized by ILPA. “I wonder whether limited partners have the consistent, comparable information they need to make informed investment decisions."

Outside of North America, investors see fewer prospects for regulatory changes, according to the Coller Capital survey. Thirty-five percent of European limited partners and 33% of those in the Asia-Pacific region expect more regulation in their home markets, the survey shows.