The walls go up

On both sides of the Atlantic regulatory barriers are making fundraising for ‘foreign’ firms more difficult and expensive. GPs in emerging markets could be left out in the cold.

Fundraising at the best of times can involve knocking on a lot of LPs’ doors. Managers raising money from Europe- and US-based LPs will in future have to jump over some substantial regulatory walls before even stepping onto the front porch.

For GPs based in these two regions, expensive compliance procedures await. GPs in emerging markets could find it twice as tough.

Countries in the European Union have been debating the scale and scope of the Directive on Alternative Investment Fund Managers that would make it more difficult for non-European GPs to raise money in Europe. The directive could potentially restrict non-European GPs from marketing their funds to investors inside the EU without obtaining a “passport” to do so from one or more regulatory bodies.


In the US, new rules requiring private equity and real estate firms to register with the Securities and Exchange Commission would impact non-US GPs if they have more than 15 US-based investors, at least one office in the US and more than $25 million in combined US investor assets. Registration won’t be cheap.

Firms have to hire extra staffers, including a compliance officer, and prepare for financial statement audits and inspections by the SEC. GPs who have already undertaken the process of registration have told PEO it takes more than a year to get it right.

Both developments are likely to result in new barriers for private equity  and real estate firms looking for capital, and they come at a time when many GPs are already having to work harder and travel further to achieve their fundraising goals.

Private equity and real estate managers in emerging markets should take particular note, as similar barriers are also being erected between them and two of the world’s most mature LP markets. Those emerging markets GPs who lean on sources of capital in Europe and North America could be left wondering why the task of raising money in an already-bleak fundraising environment looks likely to become even tougher.

A GP in Brazil, for example, may find it prohibitive to raise any kind of substantial money from US pensions, even if those pensions have an appetite for local Brazilian expertise. Those pensions can, of course, simply commit to big, US-based funds operating in Brazil, but that leaves the local Brazilian GP out of luck. That same GP may also look to Europe for money, but again it runs up against a regulatory barrier – to approach EU investors, it will need to secure a “passport”, which may be impossible depending on officials’ view of Brazil’s regulatory framework.

The regulations are intended to protect investors from risk and embed greater transparency and accountability in the system.

But – as is often the case with regulation, however wisely conceived it may be – some unintended consequences could arise. And in this case, the victims very well may be private equity and real estate firms in developing markets that need capital the most.