Travers Smith's Alternative Insights: A testing moment for private markets regulators

Alternative Insights Summit 2026

We are hosting our fifth annual Alternative Insights Summit on 18 June. The day is a flagship, invitation only event for the alternative asset management industry which will this year explore the theme of "Disruptors and the disrupted".

Our summit is aimed at senior representatives from the alternative asset management industry. Spaces are limited, but if you would like to register your interest in attending, please get in touch.

Listen now or read the full briefing below

KEY INSIGHTS

FCA sharpens oversight: The UK regulator is finalising new rules on non-financial misconduct, extending its scrutiny beyond the office and setting clearer standards for personal and workplace behaviour.

Manager accountability grows: Managers must actively prevent bullying and harassment, or risk personal liability under the Conduct Rules if they fail to act.

Culture change expected: Firms can no longer dismiss poor behaviour as business as usual, with the FCA aiming to shift the conversation from 'Sexism in the City' to 'Accountability in the Office'.

A regular briefing for the alternative asset management industry

Regulators face a dilemma. On both sides of the Atlantic, they have started making proposals to deregulate private market rulebooks. After years of piling on rules, the focus is shifting to burden reduction. But they also face growing pressure to clamp down. Some are concerned that the industry is sowing the seeds of widespread investor discontent, even the next financial crisis.

Some of those concerns are over-reactions, arising from unfamiliarity. But shifting the risk of corporate defaults from banks to private funds, and opening those funds to less sophisticated investors, raises legitimate questions. Policymakers are right to address them. They are also right to prioritise burden reduction for an asset class that can deliver significant benefits to the real economy. Balancing those objectives is not easy.

The EU's recent reforms to the Alternative Investment Fund Managers Directive (AIFMD), which came into effect last month, illustrate how regulatory priorities are shifting.

EU lawmakers finalised AIFMD 2 in early 2024. The reforms liberalise the loan market, challenging the banks' effective monopoly on business lending in certain member states. But the changes mostly add burdens – for loan origination and open-ended funds, but also more widely. Even though private markets were seen as helpful in driving growth, and industry associations were successful in resisting more intrusive regulation, there was little appetite for deregulation when these reforms were being discussed.

Similarly, when the Retail Investment Strategy (RIS) was launched three years ago, the European Commission's primary concern was to protect retail investors, with little attention to burden reduction. The package is now approaching the final stage of the legislative process, but it is controversial. If passed, the RIS would impose new cost rules on all EU funds and require value-for-money benchmarking for those offered to retail investors.

"But, just as this simplification drive gathers momentum, the debate about whether private markets could trigger a broader financial crisis is getting louder."

But there is a sense that this law is already past its sell-by date and a poor fit with the EU's drive for deregulation and growth. Rumours suggest that RIS might not make it through the Parliament vote – although, at this late stage, compromise remains more likely.

This pushback does show that the political climate has shifted. New proposals that are emerging from the European Commission are mostly deregulatory. For example, an ongoing consultation on a "Market Integration Package" seeks to simplify marketing rules and streamline intra-group delegation. And now, Commission officials are actively working on more ambitious ideas to smooth out wrinkles in AIFMD and similar laws, especially for smaller managers.

There is a golden opportunity for the industry to engage with this process and push for better regulation – but caution is also needed. Any reform proposal becomes a Christmas tree on which member states and Parliamentarians can hang their baubles.

In the UK, meanwhile, the FCA is expected to consult in July on proposals to reform the UK's post-Brexit version of AIFMD. That could see several changes, potentially more ambitious, including raising the size thresholds at which the most demanding rules apply. Meanwhile, the FCA is peppering UK firms with data requests and conducting thematic reviews into valuations and conflicts of interest. Policy development has largely been devolved to technocrats, which makes the direction more predictable.

The US is moving in the same direction. Recent SEC proposals to reduce regulatory burdens are an explicit reversal of some Biden-era reforms. The SEC's current Chairman, Paul S. Atkins, argues that those changes "led to overly burdensome disclosure requirements for advisers, distracting them from their core investment functions."

But, just as this simplification drive gathers momentum, the debate about whether private markets could trigger a broader financial crisis is getting louder. Commentators, and even the chief executive of JP Morgan, have raised concerns about "cockroaches" – hidden credit problems amongst private credit borrowers – the links between banks and credit funds, and the distribution of private markets products to a broader range of (wealthy) investors.

In a recent letter to the Financial Times, Travers Smith partners pushed back on some of the concerns, arguing that the risks are recognised and well-managed. A respondent pointed out (fairly) that the firm also has a contentious insolvency practice and accomplished litigators who would benefit from disruption. It is true that litigation risk is rising and some claims are likely, particularly if the economic environment significantly deteriorates. But regulators (at least in Europe) are not sitting on their hands.

The Bank of England is currently engaging with a group of alternatives firms to stress-test how they would react to an adverse market scenario, with a full report due in early 2027. In its recent Wholesale Buy-Side Regulatory Priorities Report, the FCA has also emphasised the importance of risk management in private market firms and will be undertaking further supervisory work on this in the near future. So systemic and entity-level risks are being identified, and the asset managers we are working with are alive to them.

Meanwhile, rational and sophisticated investors continue to increase their exposure to alternatives.

Private markets are evolving, and that evolution brings new risks. Those risks deserve the scrutiny they are getting, and the industry is actively engaging with regulators. But the asset class also delivers real benefits – to growth companies, to investors, and to the broader economy. The task for regulators on both sides of the Atlantic is two-fold: to pursue better, simpler regulation while protecting vulnerable investors and the financial system. It is a tough but crucial challenge. It is not yet clear whether regulators will be able to meet it.

Read Phil Bartram Profile