New regulation wreaks havoc on private equity houses' returns
The burden of regulatory compliance is causing "misery" for private equity houses, with associated legal and compliance costs eating into returns, according to Better Capital managing director Jon Moulton. Speaking at Legal Week's Private Equity Forum last week (13 April), Moulton said regulation such as the European Commission's Directive for Alternative Investment Fund Managers (AIFM), the forthcoming UK Bribery Act, the US' Dodd-Frank Act and carbon reporting requirements were causing undue problems for buyout houses.
April 21, 2011 at 03:21 AM
3 minute read
The burden of regulatory compliance is causing "misery" for private equity houses, with associated legal and compliance costs eating into returns, according to Better Capital managing director Jon Moulton (pictured).
Speaking at Legal Week's Private Equity Forum last week (13 April), Moulton said regulation such as the European Commission's Directive for Alternative Investment Fund Managers (AIFM), the forthcoming UK Bribery Act, the US' Dodd-Frank Act and carbon reporting requirements were causing undue problems for buyout houses.
He said that while the increasing regulatory burden was not the biggest challenge facing private equity houses right now, it was causing headaches. "[Regulatory costs] are going to be going up now as far forward as you can see. The requirements of dealing with rules on both sides of the Atlantic – with increasing requirements to report on virtually everything – mean that actually quite a material part of management fees will vanish into that area."
He added: "There's nothing moving favourably for the industry. [The pieces of legislation] are individually not lethal blows but they do take a lot of the fun out of the business and, I'm afraid, they chuck a great deal more business in [the direction of lawyers]."
Moulton – one of the best-known figures in UK private equity – said biggest challenge facing the sector is the inevitable rise in interest rates, with the mountain of debt accumulated during the boom market between 2005 and 2008 leading to significant debt problems for some houses when interest rates go up.
Nevertheless, Moulton said the UK private equity market was the most consistently stable generator of good returns in the global buyout market, with 10-year returns on buyouts in the UK standing at around 17% internal rate of return (IRR).
In his overview of the market, Moulton said half of all UK private equity investment ever was made between 2005 and 2008. Since then the size of the UK deals has dropped from £31.6bn in 2007 to £19.5bn in 2008 and £7.5bn in 2009. However, the 2010 figure is set to show an increase, with both volume and size of deals recovering.
The Private Equity Forum, which was held at the Chancery Court Hotel, included speakers from law firms and buyout houses such as Simpson Thacher & Bartlett partner Jason Glover and O'Melveny & Myers partner John Daghlian, who discussed the European fundraising market, and CVC Group legal director Richard Perris.
The event was chaired by Mark Kenderdine-Davies, general counsel and company secretary of CDC Group, who noted that despite a difficult few years, there are now reasons for optimism, with higher volumes of deals and a slight increase in bank lending.
He commented: "Despite the challenges, most private equity investors and managers are still standing and I detect a note of cautious optimism within our industry."
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