Private Equity Markets and Regulation: Policy Issues and Lessons from Dutch Institutional Investors

The recent growth of private equity markets – and their visibility in the public eye – has been accompanied by rising public concerns about transparency, investor protection and governance. The pressure for regulation of private equity funds is increasing. The issues for policy makers are whether strengthened private equity regulation is warranted and, if so, in what ways.

Private equity has recently drawn public attention to itself in cases where it has initiated corporate restructuring (involving job losses) or opposed management strategy (e.g. Deutsche Börse). Such events have highlighted concerns about accountability. But in so far as private equity managers can foster important gains in efficiency, the real issue for policy makers should be how to enhance its development and role as a catalyst of economic growth.

This paper summarizes the results from a recent empirical study from a new dataset from 100 Dutch institutional investor’ domestic and international asset private equity allocations. The data indicate that the comparative dearth of regulations of private equity funds impedes institutional investor participation in private equity funds, particularly in relation to the lack of transparency. The data further indicate that regulatory harmonization has increased Dutch institutional investor allocations to domestic and international private equity funds, particularly via the harmonization from the International Financial Reporting Standards (regulation of reporting standards and transparency), the Financieel Toetsingkader (regulation of portfolio management standards such as of matching assets and liabilities), and Basel II (regulation of risk management and disclosure standards).

This paper also discusses related empirical evidence on the effect of regulation on the development of private equity markets. Most notably, the most recent empirical evidence from Europe indicates low capital gains taxation stimulates the supply of entrepreneurial capital, while entrepreneur-friendly bankruptcy laws stimulates the demand for entrepreneurial capital.