For private market fund managers, regulation has long both impacted and driven investor sentiment. It has also played a central role in deal complexity, particularly with cross-border transactions that need to meet varied compliance requirements in different jurisdictions.
Looking ahead, a challenge for many private market firms is that global regulation continues to grow, adding even more complexity to how they run their businesses, invest strategically, optimize returns, and deal across borders.
In early 2024, CSC surveyed 400 senior private markets professionals in Europe, North America, and Asia-Pacific on a range of industry subjects. A core part of the focus was on the intrinsic role that special purpose vehicles (SPVs) play in their day-to-day activities, and the impact on SPVs from new regulation and other challenges.
We have used the results of this research to inform our new report, SPV Global Outlook 2024: Charting the Course for Growth in Private Markets.
A headwind and tailwind for managers and the implementation of SPVs
Regulation is both a headwind and tailwind for managers and the implementation of SPVs.
Europe’s new ELTIF 2.0 legislation, for instance, meant to simplify investing in major infrastructure projects, should spearhead greater investment in large-scale European and global real asset projects.
Corporate transparency rules such as the Corporate Transparency Act (CTA) in the U.S. and Ultimate Beneficial Ownership (UBO) legislation in Europe are creating greater compliance complexities and associated risks of failing to adhere to jurisdictional standards. Further, the Anti-Tax Avoidance Directive 3 (ATAD 3) is a European Union measure that will impose minimum substance requirements for SPVs if it comes into play on January 1, 2025.
Likewise, the Base Erosion and Profit Shifting (BEPS) 2.0 initiative, initiated by the Organisation for Economic Co-operation and Development (OECD) in 2019, represents a significant global effort to address tax avoidance. Pillar Two of BEPS 2.0 could require fund managers to reassess their investment structures. Investments routed through lower tax jurisdictions may become less attractive, prompting a reevaluation of the tax implications for current and future investments.
Regulation also largely remains jurisdiction dependent, with sponsors required to be aware of all regulatory developments in multiple jurisdictions, which often adds to the complexity of deals. Even in pan-regional markets such as the EU, both EU and country specific rules often need to be taken into account at the same time.
In such a dynamic, multi-regulatory environment, the need for managers to be on top of rules has never been as important as it is today—and critical to managing SPVs.
Regulatory planning
The good news is that our research found that a majority of private markets professionals proactively identify potential regulatory changes as early as possible and plan for their implementation in advance of the deadline (60%).
The less good news is that more than a third (34%) admitted to leaving the planning until just before implementation.
Respondents in Asia Pacific were the most prepared, with two-thirds (66%) saying they proactively identify changes early on and plan for implementation ahead of the deadline.
More than half (57%) of real assets respondents said they proactively identify changes early and plan for their implementation in advance. More than one-third (36%) of respondents know about these changes and yet leave their planning to the last minute. Respondents in other private market strategies had a fairly similar outlook on regulatory changes to their real assets counterparts: almost two-thirds (63%) said they prepare in advance, while almost one-third (31%) leave planning to the last minute.
Access to suitably qualified staff has also become one of the most significant factors in setting up and running an SPV. When asked about specific issues and challenges, 71% of respondents cited it.
Likewise, 69% cited complying with economic substance regulations—such as ATAD 3—while the same number (69%) said it was responding to regulatory changes.
Outsourcing SPV regulatory management to specialists
Regulatory complexity and new regulatory demands will naturally impact SPVs and other structures used by private market participants. The fundamental need to be aware of and compliant with these changes remains absolutely paramount.
Outsourcing SPV management to specialists allows sponsors to stay on top of regulatory developments and reporting requirements across jurisdictions, radically simplifying one of the most significant and risky elements of using SPVs.
As CSC has seen in the market among our stakeholders, issues such as regulatory complexity, finding suitable talent, and meeting economic substance rules have resulted in a greater focus on the benefits of outsourcing to third-party specialists able to effectively manage and resolve such concerns.
Importantly, given the powerful technologies now available, private markets managers no longer need to have multiple outsourcing partners as new technologies mean one service provider with local experts in many jurisdictions can handle a global, multi-regional relationship.
How CSC can help
Managers who want to outsource need to consider partners that have a global presence, appropriate technology, and years of experience to help them manage SPVs effectively and take advantage of the many potential benefits of using SPVs. CSC provides global coverage and an unparalleled suite of solutions for our clients, supported with best-in-class technology.
CSC’s on-the-ground presence in multiple jurisdictions offers follow-the-sun support for our clients. We eliminate the need for overlapping outsourcing partners, which can result in unnecessary complexity in itself and multiply risks.
Interested in finding out more? Download and read our latest SPV Global Outlook 2024 report.
