Riding the regulation wave: The cost of private equity regulation

Private equity has developed into a major player in the global economy. Regulatory reform of alternative asset classes continues to be a topic of misperception and apprehension among investors, fund managers, and governments alike. There exists an efficient policy design problem, wherein having a self-regulatory market and explicit regulation with the potential to unnecessarily restrict trade creates market inefficiency and increases costs without achieving a reduction in systematic risks. This paper provides comparative arguments on both the regulation and deregulation of the private equity asset class in response to market changes including the financial crisis, political and government changes and international trade, and seeks to fill the gap in the academic literature between regulatory reform and private equity investment. We conclude that greater consultation is needed between regulators and industry, and that greater regulation does not solely reduce systematic risk and increase efficiency. Similarly, deregulation does not lead to increased systematic risk and reduced efficiency. To empirically test this we run a Heckman two-step regression over three time periods to evidence the difference between financial and strategic target firm’s abnormal returns. We find a range of external factors beyond industry self-regulation (information asymmetry) and law reform contributes to market trends