Developments of main regulations of private equity

The advantages associated with debt financing are because it reduces the corporate taxes imposed on the business, making it more profitable. Private equity also ensures that the managers are in tune with the interests of the shareholders. Technically, private equity seeks for companies that are already established but need to be revitalized to be valued more (Fraser-Sampson, 2010). Private equity has also been referred as the activity of making a company private by restructuring it and selling it at a higher value. The history of private equity began in the US where top rank investors were able to access investment in private equity with ease. This paper aims at analyzing the requirements and the developments in the industry of private equity funds in the United States of America and Europe.

At this point, it is good to ask the question, what is the role of private equity investors? The first role of these investors is to raise money from wealthy persons, limited companies such as insurance companies and retirement funds. The money is also raised through their personal contributions that consist of between 1 to 5% of the capital. The investors also ensure that the limited partners commit a significant amount of capital commitment rather than have many small investors that may be cumbersome for the company. The second role is that they analyze and close deals regarding the sale of companies. The final role of the investors is to sell the companies at a profit. The private equity firms normally exit after a period of about 3 to 7 years after the initial investment (Caselli, 2018).

The period depends on the performance of the company. The main idea before exiting is to cut on the operation costs, optimization of the working capital and increasing the revenues. After that has been achieved, the company can then confidently sell the portfolio of companies that it had acquired. This is under the Delaware Revised Uniform Limited Partnership Act. This act gives the limited partners limited liability such as having a separate legal capacity. The personal liability of the limited partners is also subject to the amount of capital contributed by the partner. The manager of the fund is a general partner and controls the company on behalf of the limited partners. The regulatory framework of the private equity fund is characterized by non-registration of the securities, where certain requirements by the federal securities regulations have been complied with.

In April 2014, Mary White, pointed out the inappropriate activities that were being carried out by the private equity funds. These included, charging the wrong fees, lack of allocation of expenses and fees and poor monitoring of fees. Upon conducting 150 tests, the compliance inspections office discovered that, there was violation of regulations in dealing with the expenses and fees. Private equity advisors use the limited partners to acquire the privately traded companies. Such malpractices together with the transparency concerns and control gave an avenue to the firm’s advisor to benefit him or herself at the expense of the investors such as the insurance companies, pension funds and other stakeholders of the private equity fund. The treasury department has provided tax shelters.

This implies that the taxpayer can provide information on transactions that are considered “reportable”. A reportable transaction is one which occurs with an agreement on confidentiality. Many of the transactions and the documents of a private equity fund are confidential and therefore fall under this category of “reportable” transactions. This therefore means that any person interested in running a private equity fund within the United States will be required to disclose all the confidential information. This method provides a false value after a sale is reached. The measure that gives the true value is the index on the stock market. The members of the European Union have started the implementation of the AIFMD. Any company having its private equity fund within Europe or any other country which is a member of the European Union will be subjected to this new regulation (Batton & McCahery, 2015).

The Act contains a series of requirements that the PE firms must adhere to. The AIFMD also requires that the managers of the private equity fund provide a proper depositary. The recipient must be liable for the losses of assets that might occur under their possession. The depositary is also expected to oversee the flow of cash in and out of the depository and provide the required information (Boeckman, Greenwald,Von & Practising Law Institute, 2013). The recipient should also know the procedures and policies that will be needed in the course of handling the deposits. Many private equity funds do not have any approach to risk management. This limits the ability of banks to invest in private equity and therefore divest. The funds will also have to comply with the Securities and Exchange Commission new policies and guidelines.

The financial oversight council will also be regulating the managers (Sommer, 2013). If a fund is likely to fail and its failure may cause destabilization in the economy, the reserve board will impose capital limits on the manager. The Volcker rule will lead to less capital investments by the banks in the private equity business. Recommendations While providing the recommendations for addressing private equity investor protection, one must look at the needs of the various investors e. g. the wealthy individuals, group investors, insurance companies, banks, pension funds among other investors. The first way that investors can be protected is through the reconsideration of the sophisticated investor method. In this approach, the investor protection was based on a private equity contract. This means that when a sophisticated investor makes a poor decision, it affects all the normal investors around him or her.

There have been cases of pension funds suffering huge losses from investing in private equity. The government bails out the institution using the tax payers’ money. This indicates the impact that a single failure in the PE industry would trickle down to several other areas affecting other individuals who may not be directly involved with the PEFs. Conclusion The private equity fund has over the years been transformed in terms of regulations to create more confidence and protect the investors. Oxford: Oxford University Press. Bernstein, S. Private Equity and Industry Performance. Cambridge, Mass: National Bureau of Economic Research. Boeckman, P. Labor Regulations and European Private Equity. Cambridge, Mass: National Bureau of Economic Research. Caselli, S. Private equity and venture capital in Europe: Markets, techniques, and deals.