Private capital continues to permeate nearly every aspect of modern life. It’s increasingly difficult to keep track of how many well-known high street brands are owned by private equity (PE) firms — and chances are, you’re a regular customer of several. More recently, there’s been rising concern over private capital moving into even more socially sensitive sectors, such as residential housing and healthcare.
There’s also growing discussion about the potential “democratisation” of private equity, or the idea of opening up access to retail investors. Given its reputation as a sophisticated and high-risk asset class, the success of such initiatives will depend heavily on strong safeguards and thoughtful implementation.
In this context, the UK Financial Conduct Authority (FCA) has launched an experimental sandbox initiative — the Private Intermittent Securities and Capital Exchange System (PISCES). This platform is designed to test secondary market mechanisms and intermittent trading for private securities, with the aim of injecting greater liquidity and market dynamism into the private capital space.
You may have heard about ‘dry powder’ and slowed down PE exits recently.
Despite its widespread influence, the reputation of private equity remains polarising. To better understand this sector, particularly from a governance and regulatory perspective, we’ll examine the compliance ecosystem in PE across a series of articles. This is the first.
The Three Layers of Private Equity Compliance
Compliance in private equity can be understood across three distinct but interconnected levels:
a. General Partner (GP) level
b. Fund level
c. Portfolio company level
In addition, there are certain Limited Partner (LP) obligations, which straddle both the GP and fund levels.
A handful of recurring compliance focus areas include:
– Fees
– Conflicts of interest
– Valuations
Among these, conflicts of interest tend to underpin the other two, creating a persistent area of regulatory concern.
Level 1: GP-Level Compliance
The General Partner (GP) — often referred to interchangeably as the private equity manager or firm — is the entity responsible for managing the fund. Compliance at this level forms the top tier of the three-tiered framework, with all decisions made here cascading down to the fund and portfolio company levels.
The GP is also typically responsible for designing, maintaining, and enforcing the firm’s compliance program. This includes the creation of a compliance manual — a key control document — which outlines policies and expectations applicable across the organisation. Note that while portfolio companies may have their own compliance manuals, these are separate documents, tailored to their individual operating environments.
Level 2: Fund-Level Compliance
The fund is the legal entity into which investors commit capital and through which the private equity firm executes its investments. At this level, compliance falls into two categories:
- Fund-specific obligations: Regulatory or operational requirements that apply directly to the fund (e.g., reporting, NAV calculation).
- GP-related obligations: Those that stem from the GP but influence or involve the fund (e.g., fee arrangements, disclosures).
Although the GP typically implements fund-level policies, it’s important to differentiate between who holds the obligation and who performs the task.
Level 3: Portfolio Company-Level Compliance
Portfolio companies — the businesses in which the fund invests — maintain their own compliance frameworks, aligned with their operational, legal, and regulatory environments. However, reach-through compliance issues may arise: for example, a material breach at the portfolio level could expose the fund and GP to reputational or regulatory risk.
Implementing a Compliance Program: What It Takes
A successful compliance program within a private equity firm typically hinges on three core elements:
- Documentation
This includes compliance manuals, codes of conduct, conflict of interest registers, and operational policies. Many investment or operational documents — while not compliance-focused — still reference or impact compliance obligations.
- Personnel
GPs must appoint, train and empower individuals (or teams) to design, implement, and oversee the compliance program. This may include both internal staff and external consultants.
- Additional Resources
In today’s regulatory environment, technology plays a critical role. PE firms increasingly rely on third-party compliance software, monitoring tools, and analytics platforms to enhance effectiveness and scalability.
The Role of the Chief Compliance Officer (CCO)
Across jurisdictions, PE firms are expected to designate a Chief Compliance Officer (CCO). For example:
- In the UK, the FCA requires regulated firms to appoint a CCO under the SMF16 (Compliance Oversight) designation.
- In the US, the SEC mandates a CCO under Rule 206(4)-7 of the Investment Advisers Act of 1940.
Beyond regulatory compliance, CCOs are increasingly tasked with fostering a “culture of compliance”. Though not a legal term, this concept refers to an environment where ethical conduct and proactive adherence to standards are the norm — not the exception.
A good example is the “open-door compliance policy”, where employees are encouraged to speak openly with the CCO about policy questions or suspected violations without fear of retaliation.
CCO Models: In-House vs. Outsourced
CCO structures in private equity vary by firm size, complexity, and jurisdiction. Broadly, two models are common:
a. In-House CCO
- Dedicated: The CCO focuses exclusively on compliance responsibilities.
- Shared: The CCO balances compliance with other functions (e.g., legal, operations).
b. Outsourced CCO
- A third-party professional or firm serves as the CCO under contract.
- This model offers flexibility, particularly for smaller or emerging managers.
⚠️ Note: Regulators such as the US SEC have expressed a preference for in-house CCOs, citing concerns about accountability and cultural alignment in outsourced arrangements.
Limited Partners (LPs) and Their Role
Private equity funds are usually structured as limited partnerships, with LPs (investors) contributing capital. While the GP manages the investments, LPs interact regularly with the GP for:
i. Performance reporting (typically quarterly)
ii. Operational due diligence
iii. Queries on fund governance or portfolio activity
Often, third-party administrators support these processes by handling NAV calculations, fund accounting, and investor communications.
Final Thoughts
Private equity compliance is a multi-layered discipline, evolving alongside regulatory expectations and industry complexity. Understanding the interdependencies between GP, fund, and portfolio company compliance is critical — not just for staying compliant, but for building trust and long-term investor confidence.
In the next articles in this series, we’ll delve deeper into key compliance themes like limited partner advisory committees, valuation oversight and fee transparency — and how they shape the future of private markets.
