While private-equity market participants globally are worried about proposed European regulations, those in Asia are more concerned about general regulatory uncertainty, according to a report* released yesterday by US financial services group BNY Mellon and information provider Private Equity International.

Private-equity participants globally are concerned about potentially expensive and cumbersome requirements of the European Union's proposed Alternative Investment Fund Manager (AIFM) directive.

But Asia-based general partners (GPs) tend to be more concerned about general regulatory uncertainty, which may negatively affect the development and growth of this relatively nascent private equity market, the report says. China, in particular, is singled out, with the regulatory regime there perceived to be less clear and stable.

(This reflects the findings of other surveys that Asia-based investors and fund managers are less anxious than those elsewhere about the likely impact of the AIFM proposals.)

Meanwhile, the report says Asian limited partners (LPs), many of them newer to the private-equity asset class, are enthusiastic about opportunities that lie ahead, but are concerned by tax challenges and sometimes restrained by cautious board members.

That concern and caution appears to be reflected in the findings, with just 14% of LPs in Asia (including Australia) saying they will increase their stake in the sector, and 71% saying their allocations to private equity will not change. That compares to the global response from LPs, whereby 33% say they will increase their private-equity allocation and 46% will keep it the same.

The fact that they had an awful year in 2009 presumably doesn't help either, and things aren't a great deal better so far in 2010, according to research firm Preqin.

Moreover, the potential for new taxes and regulations to increase costs for private-equity firms add to indications that smaller fund sizes and lower fees may reduce revenue streams for GPs, says the report.

These pressures come at a time when GPs are spending more time and money on fundraising and are being asked to improve their investor relations services. Tim Jenkinson, a professor of finance at the Saïd Business School at the University of Oxford in the UK, says many GPs are delaying hitting the fundraising trail, hoping that time (and markets) will heal their investments.

For all GPs, raising the next fund will be more demanding, he says. "The heady days when capital was recycled so rapidly that LPs had difficulty maintaining their target allocations for private equity stand in sharp contrast to today's market," Jenkinson says. Still, there is good news for Asia on this front, in that North American and European GPs indicated they are bound for Asia during their next fundraising roadshows.

However, many portfolio companies have levels of debt that will soon need to be refinanced and may be unsustainable, Jenkinson points out.

"Darwinian selection works effectively in private equity given the nature of the limited partnership model," he says, "Survival depends on whether investors are prepared to re-invest." For some, a previously consistent track record will be seriously tarnished and they will have to explain why investors should look beyond their most recent funds.

"They may survive, likely with a smaller fund," says Jenkinson. "For others it will be game over."

All GPs need to adapt to the new environment, where investors demand more clarity about the ability to earn returns over the economic cycle, more information about investments and lower fees, as well as better alignment of interests. The result could be a stronger private equity sector for those that survive, says Jenkinson.

The report is based on research collated from December 2009 to March this year in which 102 interviews were conducted with GPs, LPs and other industry stakeholders. Of the respondents, 21% were based in Asia-Pacific; 50% in North America; and 29% in Europe. Total private-equity capital committed by responding LPs including private-equity funds of funds was $178 billion, while total private-equity capital commitments managed by responding GPs was $250 billion.

Private equity faces the future: candid views from the market.