There has been no shortage of headlines surrounding private markets regulation over recent weeks, with watchdogs on both sides of the pond baring their teeth.

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The latest in the UK is that Financial Conduct Authority chair Ashley Alder has said regulators need to consider the tools and data they require to oversee the activities of non-bank financial intermediation (NBFI) and private markets more broadly. A ‘global effort to improve the data needed to enable regulators to spot risks’ is necessary, he said.

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This comes after the regulator outlined controversial plans to ‘name and shame’ companies under investigation at an earlier stage. While this proposal is very much still in its infancy, with a significant City backlash already having made headlines, it is yet further evidence that British authorities are looking to play hard ball with wrongdoers – and private equity firms are unlikely to be spared.

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Meanwhile, across the pond, the SEC has made no secret of its growing wariness of the private equity space. It was reported on May 28 that several of Wall Street’s largest PE firms – including Blackstone, TPG and Carlyle Group – are negotiating settlements with the SEC over their employees’ use of banned communication channels as part on an industry-wide sweep by the regulator.

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In addition, Apollo said some of its investment adviser subsidiaries have also received a request for information from the SEC for the record-keeping investigation, which suggests yet more firms in the space could be in the firing line over the coming months.

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Given the size and rate of growth of the global private equity sector, it is somewhat surprising a global regulatory crackdown on its inherently opaque processes hasn’t come sooner. Indeed, according to McKinsey & Company data, private markets assets under management have grown rapidly over recent years, rising to $13.1tn as of June 30, 2023 – a considerable 12% increase on the previous year.

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While several alternative investment groups recently had success suing the SEC over a rule intended to give investors more transparency into private funds, this hardly seems the right approach when it comes to instant messaging enforcement action – both in the US and further afield.

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Collaboration is king

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The sheer scale of regulatory action over firms’ instant messaging record-keeping failures offers perhaps the most convincing argument why PE shops won’t be spared scrutiny.

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Since December 2021, the SEC alone has taken legal action against 60 companies and levied over $1.7bn in fines for their failure to retain records of employee communications on apps like WhatsApp and Signal. While the FCA hasn’t thus far taken the same approach, there are growing signs it could look to do so over the coming months.

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Watchdogs clearly view the use of instant messaging platforms as a serious risk in modern markets. Beyond the dangers of poor record-keeping – which is crucial for audits, investigations and wider market operations – there is also the elevated risk of fraud and market manipulation.

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With this in mind, the prudent move is to assume regulators will grow increasingly vigilant over firms operating in the space, with record-keeping practices likely to be a key focus area.

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Collaboration is the smartest play in this context. PE firms operating in the UK will need to put in place sophisticated communications capturing, monitoring and surveillance capabilities long before the FCA implements its ‘name and shame’ plans – should they receive the green light – to clear their name at an early stage and mitigate any reputational damage. If they haven’t already, US firms should also look to do the same, particularly following the recent revelation that self-reporting a violation can result in a much less severe penalty by the SEC.

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Fortunately, comprehensive tech solutions are now readily available to financial institutions. These can safeguard investors against record-keeping failings, while simultaneously allowing staff to communicate in the way their clients and counterparts are most familiar with. Beyond eradicating any risk of a PE firm incurring record keeping-related messaging fines, the company’s compliance department can easily assist authorities with an investigation should they come knocking. Or, perhaps more accurately, when they come knocking.