Finding stability in a sea of uncertainty

As public markets appear to settle, even if temporarily ahead of the UK’s Budget on 17 November, assessing the landscape for private markets requires wading through reams of political statements and navigating amid clouds of uncertainty hanging over the horizon.

While relative value for EUR-denominated funds may not have moved as significantly as for GBP if shopping in USD, value still remains.

Notoriously fickle, the FX markets may move later in the year following the US midterms and as central banks continue with expected interest rate increases.

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Scanning for potential regulatory environment changes, the market turmoil and political chaos that engulfed the UK, have, perhaps, postponed some of the leadership campaign pledges targeted at the UK regulatory authorities. Rishi Sunak endorsed the “call in” provisions and, despite not making its way into the original financial markets bill, this is expected to be added via amendments to the bill by MPs.

Despite this endorsement, the progress of the bill has taken a bit of a backseat and the overall announcement of much heralded ‘Big Bang 2.0’ appears distant at best.

Much of the ‘Big Bang 2.0’ was centred around increasing UK competitiveness, rolling back European Union laws and regulations, and freeing up private capital.

A review of Solvency II and relaxation of the capital requirements for insurance firms has been touted as releasing billions of pounds for investment.

Given the recent financial shock and the impact we have seen on pension funds, this move may prove to be more aggressive than the macro environment can stomach.

In this environment, the relationship between the government with the Bank of England and the Financial Conduct Authority may change.

Both entities were squarely in the crosshairs of the previous occupant of 10 Downing Street with campaign promises of combining the UK regulatory bodies (the FCA, PRA and Payments Systems Regulator) into a single mega regulator.

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However, campaign promises are often swiftly forgotten and it is clear that the FCA is continuing with its published business plan and focussing on various areas of the market such as MiFID transaction reporting and protecting consumers through the new consumer duty. 

Potential longer term strategic impacts however may be felt sooner rather than later.

The democratisation of private equity remains a key overall strategy for the sector.

While efforts to create structures enabling the desired investments are far from bearing fruit, the entire premise may come under further scrutiny as liquidity mismatches fall under the spotlight once again following redemption requests from various real estate funds by pension funds.

The potential liquidity mismatch, as demonstrated during the Neil Woodford fund issues, remains a key barrier in opening private equity to the retail market.

While structures such as the LTAF seek to address some of these issues, and other market participants are working on semi-liquid options, the overall perception of private equity being a high-risk investment and something for institutional investors alone persists.

The current cost-of-living crisis will inevitably foster the attitude towards the financial sector that has lingered since the global economic crisis.

So, if the private markets wish to engage with a broader investor base, then allaying some of these attitudes and fears will be critical.

While the image of asset stripping sadly persists, the story of millions of jobs existing through private equity ownership and the increasing practise of providing equity stakes to employees of those companies is far less frequently told.

With these different pressures, capacity constraints across the general operations area, including compliance, can become problematic.

There is no end to the regulatory reporting requirements, be they Annex IV reports for AIFs, different jurisdictional filings when marketing, or any of the ongoing reporting under IFPR.

It is no wonder that “outsourcing” of compliance tasks is becoming commonplace, replicating finance departments, which have now long been outsourcing various tasks to fund administrators or independent third parties.

Having third parties provide managed services that operate some, or all, of a testing program, conduct chaperoning of expert network calls, review electronic communications or process personal trading requests or Gifts and Entertainment notices is well underway, freeing up crucial internal resources to address the more business critical needs.

There are challenges ahead for the markets, public and private, and the two no longer operate in isolation. Setting a flexible and targeted plan to deal with items that you can predict and working with the right partners to develop a robust programme will allow you to deal with whatever emerges from the political mists.

Andrew Poole is director, European regulatory advisory, at ACA Group