Hedge funds and Private Equity - PES

Corporate governance provisions
Rules relating to the fair and equitable treatment of different classes of shareholder are needed
to ensure that funds cannot use pricing policies to attract potential investors or dissuade potential
sellers.
Measures should be introduced through the insurance and occupational pension funds regulatory
framework to ensure that high standards of due diligence are undertaken when alternative
investments are included in pension fund or insurance fund portfolios.
We can consider the introduction at European level of some regulatory quantitative or principlebased
constraint on the alternative investments’ exposure of pension funds and other collective
investment schemes such as mutual or insurance.
Tax treatment
Introduce a fiscal discrimination, to including FOHFs and all tax-exempt organisations, against
offshore products and change the tax rules so that the location of the manager determines the
tax position of hedge funds.
5.2 Private Equity Funds
Improving transparency
The first regulatory step to be taken is to increase the transparency of alternative investment
funds by requiring reporting at regular intervals to an appropriate regulatory authority on (i) the
investment strategy of the company, (ii) details of the assets held by the company, (iii) disclosure
of the ‘risk management’ model used (this is especially important for leveraged companies,
and is already used for banks by the banking regulators), and (iv) the management’s incentive
structure. Greater transparency is not enough by itself, but the premise here is that, due to inadequate
transparency, many investors (including pension funds and so on) are not aware of the
risks that alternative investment funds are taking in order to get a higher return. Many alternative
investment companies would not be getting funding if investors were aware of these risks.
Greater transparency is a requirement that persons from different ideological backgrounds (free
market adherents included) can agree on.
At EU level one could argue for a directive defining minimum standards for disclosure, based on a
similar logic to the directive requiring disclosure of stock holdings of 5 per cent or more of a
company’s total shares. Under this scenario, countries would still maintain their distinctive regulatory
systems, but the imposition of minimum standards would help to reach a ‘level playing field’.
Corporate governance provisions
Long-term investors should be rewarded. This can be done by permitting weighting of voting
rights according to duration of shareholding and by means of differentiated taxation of (capital and
dividend) income from shareholdings. Golden employee-owned shares are also an option to be
further examined. Minimum holding periods to be eligible for tax exemption should be considered.
In order to prevent value extraction, limitations on the withdrawal of liquid assets from the target
company should be introduced. In particular the financing of dividend payouts via the imposition
of additional debt on the company’s assets (leveraged recap) must be stopped. Most countries
Part III – Lessons to be drawn for future regulation
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