Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
ELPs are not in and of themselves regulated entities. Instead, the focus of UK fund regulation is on the fund manager. As noted in question 9, UK-based fund managers that provide portfolio and risk management functions to AIFs are required to be authorised by the FCA as AIFMs. The AIFMD imposes substantive regulatory obligations on AIFMs, including rules relating to internal capital adequacy requirements, regulatory and investor reporting, ensuring that each AIF it manages appoints a depositary and restrictions on remuneration of employees of the AIFM, among others. As FCA authorised and regulated entities, UK AIFMs are subject to the FCA’s conduct of business rules and general FCA principles of business, including the requirement to deal with the FCA in an open and cooperative manner.
There is a lighter AIFMD regulatory regime for sub-threshold AIFMs, meaning AIFMs that manage portfolios of AIFs which, in aggregate, do not exceed €100 million or, in the case of AIFs that are unleveraged and have no redemption rights exercisable within the first five years of the AIF (ie, typical private equity funds), €500 million. To the extent an AIFM manages assets on behalf of AIFs that combine both these types of AIF, the aggregate threshold of €100 million should be applied when determining whether an AIFM can be classified as a sub-threshold AIFM. While sub-threshold AIFMs do benefit from a lighter touch regulatory regime under the AIFMD, they are not able to take advantage of the AIFMD marketing passport, meaning that they have to comply with the individual national private placement regime (NPPRs) of each EEA member state. NPPRs are not uniformed across the EEA member states and are particularly onerous in some of them. For this reason, many sub-threshold AIFMs have decided to ‘opt up’ to full-scope AIFM status.
AIFMs that operate individual managed accounts and provide related services such as investment advice will need additional permissions from the FCA for these activities and are subject to additional regulatory requirements (derived from MiFID II) in connection with these activities. Depending on the AIFM’s regulatory classification, additional regulatory requirements under MiFID II potentially include requirements to comply with provisions on transaction reporting, transaction recording, product governance, trade transparency and client classification rules.
The FCA relies heavily on authorised firms to provide information to it but reserves the right to visit, inspect and evaluate the compliance of authorised firms, typically through thematic reviews (which focus on specific industries, for instance, asset management or retail banking), or as part of its general supervisory remit. The FCA is also able to take action at a firm-specific level where it has specific concerns about a particular regulated entity. Some larger or higher risk firms (or both) are also proactively supervised by the FCA on a ‘relationship managed’ basis.
While the FCA is the primary regulator of UK-based fund managers, other regulators such as the Prudential Regulation Authority (PRA) may have regulatory oversight of certain large investment firms that pose prudential risks to the economy. AIFMs that are part of the same group as these entities or banks may be subject to prudential supervision on a consolidated basis by the PRA.
Governmental requirements
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
An FCA authorised AIFM must notify the FCA of its intention to market an ELP to investors domiciled or with a registered office in the UK. If such AIFM wishes to market an ELP on a cross-border basis into other EEA member states under the AIFMD marketing passport, the AIFM must notify the competent authority of the EEA member states into which the AIFM wishes to ‘passport’ the ELP and the FCA will in turn transmit this information to the competent authorities of the relevant EEA member states. The AIFMD marketing passport is not available to FCA authorised AIFMs that manage AIFs that are not registered in an EEA member state (for instance, a Cayman exempted limited partnership). In this circ*mstance, the FCA authorised AIFM will need to comply with each relevant EEA member state’s NPPR (where available) in the same way that an AIFM not based in an EEA member state would be required to.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
UK-based entities providing portfolio and risk management to AIFs are required to be authorised and regulated by the FCA as AIFMs (see question 10). Authorisation as an AIFM incorporates permission for the provision of investment advice in connection with the AIFs for which the manager carries on portfolio and risk management functions. Provision of investment advice in connection with investments other than AIFs managed by the AIFM is a separate regulated activity, as is the management of individual portfolio accounts. Entities carrying on portfolio management, providing investment advice in relation to investments other than AIFs managed by them, or arranging deals in investments (including funds) other than in connection with AIFs, must be authorised by the FCA to provide these services and regulated by the FCA on an ongoing basis, in compliance with the rules applicable under MiFID II.
The process for becoming authorised by the FCA, either as an AIFM or an asset manager, is a lengthy and resource-intensive exercise. FCA authorised entities are subject to a significant volume of rules, including the FCA Principles for Businesses and the FCA’s Conduct of Business rules. The FCA requires that persons proposing to carry out controlled functions on behalf of an FCA authorised firm have to be ‘fit’ and ‘proper’ to carry out such functions. Such functions include acting as a chief executive, director or partner, money laundering reporting officer and chief compliance officer of an FCA authorised firm. Such persons must be approved by the FCA to perform the controlled functions in question and are subject on an ongoing basis to the FCA’s Code of Conduct for Approved Persons and the Statement of Principles for Approved Persons. The FCA needs to be satisfied that persons proposing to carry out controlled functions on behalf of an FCA authorised firm have adequate knowledge and experience to carry out such functions. In recent years, the FCA has placed special emphasis on the integrity and honesty of persons carrying out controlled functions within the financial services industry, in a bid to improve the culture of regulated firms generally. This has resulted in the implementation of new rules for senior management and other key staff within banks and it is anticipated that similar reforms will be implemented for AIFMs and other investment firms from 2019.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
See questions 10 and 12.
Political contributions
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There are no UK rules or regulations (other than rules applicable generally in the UK in relation to political donations, (as well as general UK anti-bribery laws)) that oblige a private equity fund’s manager or investment adviser to disclose political contributions made by it.
Use of intermediaries and lobbyist registration
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
There are no UK rules that restrict or oblige a private equity fund’s manager or investment adviser to disclose the engagement of placement agents, lobbyists or other intermediaries in the marketing of a private equity fund to public pension plans and other governmental entities, although the FCA may require details of placement agents and marketing activity as part of its supervisory remit. In addition, where an AIFM seeks to market an AIF to UK investors, the FCA’s notification form for this purpose requires disclosure to the FCA of the identity of any placement agents engaged to market the fund to UK investors. In addition, article 23 AIFMD requires EEA authorised AIFMs or non-EEA AIFMs marketing to EEA investors to disclose certain information prior to closing, including the identity of service providers, which may include an appointed placement agent. Such disclosures are typically included in the private placement memorandum. Even when these requirements do not apply, the fact that a placement agent has been engaged (and the placement agent’s identity) is usually disclosed in the private placement memorandum of the relevant fund or separately disclosed to investors in responses to due diligence questionnaires. These more detailed responses increasingly include detailed disclosure of the basis on which the placement agent or lobbyist is remunerated.
Bank participation
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
Since the financial crisis there have been a high number of legal and regulatory developments that may directly or indirectly affect banks’ ability or appetite for sponsoring or investing in private equity funds. The EU prudential framework under the Capital Requirements Directive and Capital Requirements Regulation (CRD IV) contains capital and liquidity requirements associated with fund investments, which are potentially of direct relevance.
CRD IV, the fourth iteration of the EU’s prudential framework rules, was adopted in July 2013 and has applied since January 2014. CRD IV aims to implement Basel III within the EU, as well as EU-specific reforms on remuneration and governance. The rules under CRD IV governing capital treatment of private equity investments are highly complex and depend upon (among others) the extent of the bank’s participation in a particular fund and in funds generally, as well as the type of fund. The starting position is that private equity investments must be deducted from capital, although this is subject to some limitations and more favourable capital treatment may in some cases be available for certain venture capital investments above certain participation thresholds. Private equity investments that are not deducted from capital must generally be risk weighted at 150 per cent under the ‘Standardised Approach’ (for less sophisticated banks) or at 370 per cent or (for sufficiently diversified funds) 190 per cent under the ‘Internal Ratings Based’ approach (for more sophisticated banks). Recent proposals from the EU authorities published in November 2016 indicate that the future capital treatment of risk-weighted fund investments will depend increasingly on the types of underlying fund investments and the level of transparency for banks on the underlying investments.
CRD IV also introduced quantitative requirements on liquidity, which will impose a liquidity cost on banks’ holdings in funds for which commitments may be called within 30 days or less. Future changes to CRD IV will also result in the implementation of quantitative requirements on leverage and stable funding (anticipated to become effective from 2019), which may also result in increased costs associated with private equity investments.
A further issue for banks and the funds in which they invest is the potential for banks’ liabilities (which could include liabilities to funds) to be ‘bailed in’ in the event that the bank becomes subject to a statutory resolution process under the Bank Recovery and Resolution Directive (BRRD). This may include the write down or conversion into equity of banks’ unsecured liabilities. Article 55 of the BRRD requires that liabilities within the scope of the BRRD’s bail-in powers, but governed by the law of a third country, include a contractual term stating that the liability may be subject to write-down and conversion powers of the relevant resolution authority (in this case the Bank of England). Carve-outs may apply, however, for some liabilities where certain criteria (including impracticability) are met.
FAQs
All private equity and venture capital firms in the UK are regulated by the Financial Conduct Authority (FCA). The industry set up an additional self-regulatory regime in November 2007, in response to the increased demands of its investors and the self-recognition of the industry for it to do more.
Who regulates private equity in UK? ›
2. How is private equity regulated? In the UK, it is the fund manager rather than the fund that is regulated.
How are private equity funds regulated? ›
How is the private equity industry regulated? The private equity industry in the United States is regulated by the Securities and Exchange Commission's implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
What is a private equity fund UK? ›
Private equity firms use the money raised from institutional investors to acquire several (usually 10 – 15) private businesses. They aim to own and grow them for 3 – 5 years, and sell them for a profit, generating return for their investors.
How many private equity firms are there in the UK? ›
In 2020, the number of companies in the United Kingdom (UK) that received private equity amounted to 1,672. More than half of companies to receive a form of private equity in 2020 was through venture capital investments.
What is private equity law? ›
Private equity law involves negotiating, structuring, and documenting a variety of transactions including fund formations, venture capital investments, control acquisitions of public and private companies, and dispositions of previously acquired companies or investments.
What is private equity in simple terms? ›
Private equity refers to the debts and shares of companies that are not publicly traded on a stock exchange. The term may also refer to venture capital that is invested in newly started businesses, known as startups.
What is the aim of private equity? ›
The target company's assets may be used as collateral for the loans. A private equity investment aims to improve the profitability of the company, helping reduce the impact of the debt over the course of the partnership. However, leveraged buyouts will not be appropriate for all businesses.
Is private capital the same as private equity? ›
Private capital is the umbrella term for investment, typically through funds, in assets not available on public markets. Preqin defines private capital as private investments encompassing the following asset classes: private equity, venture capital, private debt, real estate, infrastructure, and natural resources.
Who regulates private funds? ›
The SEC is the federal agency responsible for overseeing the securities industry, including the registration and regulation of investment companies, investment advisers and broker-dealers. Securities offerings are registered with the SEC unless an exemption from registration is available.
Private funds are not required to be registered or regulated as investment companies under the federal securities laws. A private fund cannot publicly offer its securities.
Are private equities regulated? ›
The amendment gives Capital Markets Authority (CMA) the mandate to “license, approve and regulate private equity and venture capital companies that have access to public funds.” (Emphasis is ours).
What is a private equity fund and how does it work? ›
Similar to a mutual fund or hedge fund, a private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund.
How do private equity funds make money? ›
Key Takeaways. Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.
Is a private equity fund an investment fund? ›
A private equity fund is also a managed investment fund that pools money, but they normally invest in private, non-publicly traded companies and businesses.
How big is the UK private equity market? ›
From 2012 to 2021, the private equity market showed continuous growth in the United Kingdom. The market size of the private equity industry in 2021 was worth more than 2.9 billion British pounds.
How much do you make in private equity UK? ›
Associates earn around 56,000 UK Pounds (US $72,300) to 102,000 UK Pounds (US $131,700) per annum as bonuses. If we look at the average, it's stunning, around 71,000 UK Pounds (the US $91,700) to 84,000 UK Pounds (US $108,500) per annum.
How much do private equity associates make UK? ›
The average salary for Private Equity Associate is £90,423 per year in the London Area. The average additional cash compensation for a Private Equity Associate in the London Area is £86,627, with a range from £36,419 - £206,052.
What is private equity example? ›
These firms allocate investment money from institutional investors, such as mutual funds, insurance companies, or pensions, and high-net-worth individuals. Some examples of private equity firms include Blackstone, Kohlberg Kravis Roberts & Co. (KKR), and The Carlyle Group.
What is private equity and venture capital in law? ›
Private Equity firms invest in private companies whose financial health has deteriorated. The investment is made in established and matured companies, whereas venture capitalists invest in startups and young businesses with future potential.
Private equity lawyers will assist funds and investors to invest directly in private companies. A large part of the practice is also to set up and administer Management Incentive Schemes where the managers of such companies will obtain shares as incentivisation.
What happens at the end of a private equity fund? ›
At the end of the life of a fund, remaining investments are liquidated. Proceeds are distributed. Limited extensions to fund term possible – usually 2 years at the discretion of the GP and then longer if a majority of investors wish it.
How big is the private equity market? ›
The private markets are expected to grow to about $12.5 trillion in 2025 from $7.2 trillion in 2020, according to Morgan Stanley. Buyouts, growth equity and venture capital account for about 69% of the industry, the investment bank said.
What is private equity owned companies? ›
A private-equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital.
Why are private equity funds important? ›
Private equity funds are pools of actively-managed capital that invest primarily in private companies with the intent of creating value in the companies in which they invest by improving operations, reducing costs, selling non-core assets and maximizing cash flow.
Who are participants in private equity industry? ›
Investors who are contributing capital to private equity firms. These may include public and corporate pension funds, endowments, foundations, bank holding companies, investment banks, insurance companies and wealthy families and individuals.
What is the difference between hedge funds and private equity? ›
Key Differences Between Private Equity and Hedge Funds
Private equity funds invest in companies that can provide higher profits over a more extended period. In contrast, hedge funds are used to invest in assets that yield good ROI or return on investment over a shorter period.
What is a private investor called? ›
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.
How long do private equity firms keep companies? ›
Private equity firms' average portfolio company holding periods have historically averaged from four to five years (Strömberg 2008), and a majority of private equity firms use a five-year forecasting period in evaluating investments (Gompers et al. 2016).
Is private equity part of capital markets? ›
The capital markets include stock markets (such as the London Stock Exchange), derivative markets (including options, futures and swaps), foreign exchange, bond markets, debt securities markets and private markets (including alternative assets such as venture capital, private equity, real assets etc.).
Who regulates venture capital firms? VC fund managers in the UK are regulated and authorised by the Financial Conduct Authority (FCA).
Are all funds regulated? ›
Allfunds Bank, S.A.U. is a credit institution duly regulated by the Bank of Spain under number 0011 and authorised by the Spanish Securities Market Commission (CNMV) to act as a broker and fund distributor with registered office in Padres Dominicos, 7 , 28050 - Madrid.
How are investment funds regulated? ›
Investment funds are regulated by the Investment Company Act of 1940, which broadly describes three major types: open-end funds, closed-end funds, and unit investment trusts. Open-end funds called mutual funds and ETFs are common.
Are private hedge funds regulated? ›
Hedge funds are not regulated as heavily as mutual funds and generally have more leeway than mutual funds to pursue investments and strategies that may increase the risk of investment losses.
How many private equity funds are there? ›
Private equity funds invest across a range of industries such as energy, healthcare, manufacturing, retail, and technology. In 2020, the US private equity sector included approximately 4,500 private equity firms and 16,000 PE-backed companies.
Are private funds 40 Act funds? ›
The '40 Act also contains a number of exemptions, including one for privately offered funds such as hedge funds, private equity funds, and real estate or infrastructure investment funds.
Does MiFID 2 apply private equity? ›
(1) Many private equity firms are regulated as managers of alternative investment funds (AIFMs) and therefore fall outside the scope of MiFID II.
Does the SEC regulate private companies? ›
Private companies are subject to SEC oversight too, and this has implications for your D&O policy. Regardless of a company's status as publicly traded or privately held, the SEC has authority to investigate all companies that seek to raise capital from U.S. investors.
Is a private equity fund a private placement? ›
"Private equity" and "private placement" are distinct terms, but they interrelate in investment activities. By placing its products through private channels, a company is -- in essence -- reaching out to private investors who ultimately become private-equity holders once they inject cash into the business.
Who owns a private equity fund? ›
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and has limited liability, and General Partner (GP), who owns one percent of shares and have full liability. The GP is also responsible for executing and operating the investment.
According to Blackstone's Private Wealth Solutions group, the life cycle of PE funds is typically 7 to 10 years, and is generally broken down into three stages: the fundraising period, the investment period, and the harvest period.
Where do private equity funds invest? ›
Private Equity Funds invest in unlisted private companies in exchange for a share of their ownership. Unlisted companies usually go for PE funds when they are unable to fund themselves through the issuance of equity or debt instrument, or venture capitalists.
How do private equity funds raise capital? ›
Private equity firms raise funds by getting capital commitments from external financial institutions (LPs). They also put up some of the their own capital to contribute into the fund (commonly 1-5% but it can be higher).
What does 2 and 20 mean in private equity? ›
"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.
How much money do you need to start a private equity fund? ›
Another important factor to consider is a firm's minimum investment requirement. Historically, the standard minimum investment amount for private equity has been $25 million.
Are private equity funds open ended? ›
For purposes of this article an open-end fund is a fund, which invests in assets in an established trading market. A closed-end fund is a private equity, venture capital, or real estate fund.
How are investors in a private equity fund taxed on their share of the profits? ›
Key Takeaways. Private equity and hedge funds are generally structured as pass-through entities, allowing them to pass their entire tax obligation along to their investors or limited partners. Investors report their share of the fund's income (or losses) on their individual tax returns.
Who invests in private equity funds? ›
Who can invest? A private equity fund is typically open only to accredited investors and qualified clients. Accredited investors and qualified clients include institutional investors, such as insurance companies, university endowments and pension funds, and high income and net worth individuals.
What is a private equity structure? ›
Private equity funds are closed-end funds that are considered an alternative investment class. Because they are private, their capital is not listed on a public exchange. These funds allow high-net-worth individuals and a variety of institutions to directly invest in and acquire equity ownership in companies.
What is the difference between hedge funds and private equity? ›
Key Differences Between Private Equity and Hedge Funds
Private equity funds invest in companies that can provide higher profits over a more extended period. In contrast, hedge funds are used to invest in assets that yield good ROI or return on investment over a shorter period.
Part of the returns for investors in private equity is through receiving dividends, much like shareholders of a public company do. This process is known as dividend recapitalization and involves the process of raising debt to pay private equity shareholders a dividend.
What are blockers in private equity? ›
Blocker corporations are a common part of private equity (PE) structures and may be an effective tax planning tool because they effectively “block” the flow-through of taxable income at the corporate level for federal, state, and local income tax purposes.
Are private funds regulated? ›
Private funds are not required to be registered or regulated as investment companies under the federal securities laws. A private fund cannot publicly offer its securities.
Are private equities regulated? ›
The amendment gives Capital Markets Authority (CMA) the mandate to “license, approve and regulate private equity and venture capital companies that have access to public funds.” (Emphasis is ours).
What is private equity in simple terms? ›
Private equity refers to the debts and shares of companies that are not publicly traded on a stock exchange. The term may also refer to venture capital that is invested in newly started businesses, known as startups.
What is private equity with example? ›
Private equity is the category of capital investments made into private companies. These companies aren't listed on a public exchange, such as the New York Stock Exchange. As such, investing in them is considered an alternative.
How do private equity funds work? ›
How does private equity work? To invest in a company, private equity investors raise pools of capital from limited partners to form the fund. Once they've hit their fundraising goal, they close the fund and invest that capital into promising companies.
What is the lifecycle of private equity funds? ›
According to Blackstone's Private Wealth Solutions group, the life cycle of PE funds is typically 7 to 10 years, and is generally broken down into three stages: the fundraising period, the investment period, and the harvest period.
