While regulations are front of mind for 60% of private market managers, 34% leave the regulatory planning until just before implementation, according to Corporation Service Company’s SPV Global Outlook 2024.
Despite regulation challenges, 76% of executives believed that market conditions for special private vehicles (SPV) would improve in the next two to five years. The survey included over 400 executive-level respondents split across the Asia, North America, and the UK and Europe, with representation near equal between private equity, private credit, real estate, and infrastructure.
Among those in private debt and private equity, 18.4% expected conditions to improve in the year while 51.2% expect this to take two to five years. However, among real asset executives, 26% believe it will occur within a year and 43% anticipate a two to five year horizon.
Thijs van Ingen, global market leader of corporate and legal services at CSC, said: “Private markets remain highly attractive to investors. The market is adapting, maintaining demand, and will continue to adapt. In real estate, for instance, core plus type strategies are offering better yields because, given current interest rates, core is not presently appealing to investors. Appetite has shifted away from core and core plus strategies into more opportunistic strategies, which shows investors are focused on capital appreciation over stable income generation.”
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Complying with economic substance regulations was marked as a significant challenge across regions, with over 50% of respondents in North America and Asia marking it as ‘high importance’ and over 40% in Europe. In addition to regulation challenges, staffing was marked as a point of struggle when setting up and running an SPV. In Europe, over 70% highlighted access to suitably qualified staff as a four or five, with five being the challenge of highest importance.
Bas Coenen, head of fund solutions for CSC Europe, said “Technology and staff are core points and sore points for many private capital managers. Finding and
maintaining the right tech remains a challenge; finding and retaining quality people in a tight labour market is equally significant. Automation and tech are important and will help cushion a tightening labour market.”
Tech was a popular area for respondents to see areas of improvement, including over half calling for a centralized portal of all SPVs, and near half looking for reconciliation of bank accounts, form and entity management systems, and improved process efficiencies with the help of AI. Some 16% of respondents also called for technology to help in cost reduction, while another 16.5% wanted to see aid in regulatory compliance.
“The private capital sector is super interested in what technology, including AI, can do for the industry. This includes optimizing deal sourcing, investment, aiding portfolio performance, and so forth,” van Igen said.
“We also see that many are concerned about the quality of in-house technology, and this is spurring interest in outsourcing to specialists. They like to keep things simple, and their teams mean and lean.”
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As private markets continue to grow, Jeremy Katzeff, head of buy side solutions at GoldenSource, added that this will likely result in increased regulation on the industry, with a growing importance to plan in advance for rule changes.
“Firms operating in private markets may have been able to ensure compliance with a more ad hoc, last-minute approach in the past. With a growing sense globally that increased regulatory oversight on private markets is looming though, firms that don’t adapt and strengthen their internal processes risk being caught out by rule makers,” Katzeff said.
“As private markets AUM continues to grow, it’s understandable that regulators will look to increase oversight, and these findings from CSC exemplify the market’s lack of preparedness for a potential overhaul. Asset managers and other market participants need to be proactive in updating and scaling their risk management processes and underlying data strategies if they want to avoid being hit hard by the increased complexity and volume of regulation they must comply with in private markets.”
