Adapting to Change: Key Policy Developments Shaping Private Markets

At the same time, private markets are contending with complex global challenges—from tax reforms and sustainability mandates to evolving valuation and reporting standards. These changes are poised to redefine how fund managers operate, interact with investors, and deliver returns.

As the UK seeks to maintain its position as a global hub for private capital, managers are navigating a delicate balance: responding to regulatory demands while preserving competitiveness in a rapidly evolving market. This article delves into the latest policy and regulatory developments, offering insights on their implications and how private market participants can prepare for the road ahead.

Carried interest: Changes in the UK tax landscape

The UK’s carried interest regime is set for significant change following the Autumn Budget. Rachel Reeves, under the new Labour government, outlined sweeping tax reforms aimed at addressing fiscal challenges and aligning the UK with global taxation norms. These measures mark a decisive shift in policy and are expected to have far-reaching implications for private markets.

• Capital Gains Tax increase: Effective from April 6, 2025, the Capital Gains Tax (CGT) rate on carried interest will rise from 28% to 32%. This move places the UK among the highest-taxed jurisdictions for carried interest, on par with France and New York.
• Shift to trading income: In a dramatic overhaul of the current framework, carried interest will be treated as trading income rather than capital gains, fundamentally changing its taxation basis.

Additional measures include the extension of Income-Based Carried Interest (IBCI) rules to employees alongside LLP members and the introduction of taxes on non-UK residents’ carry related to UK-based services, subject to double tax treaties.

These reforms, while aimed at addressing perceived inequities in the taxation of private capital, risk diminishing the UK’s competitive edge unless counterbalanced by broader incentives or strategic industry support. Private markets participants will need to act swiftly to navigate this evolving landscape and mitigate the potential disruption caused by these policy shifts.

Key tax risks in due diligence for private equity investments

Tax due diligence is a critical component of private equity transactions, ensuring compliance, mitigating risks, and preserving value throughout the investment lifecycle. Private equity managers must prioritise four key areas where tax risks often arise:

• Restructuring: Many private equity investments require significant restructuring to streamline operations, improve efficiency, or position the business for growth.
• Refinancing: Leveraging debt is a common strategy in private equity transactions, but refinancing activities can give rise to tax concerns. Thorough tax analysis helps structure debt efficiently while mitigating regulatory exposure.
• Tax action plans: During due diligence, managers often uncover tax risks at purchase. Developing and executing a robust tax action plan ensures identified risks are addressed proactively. This safeguards the investment and builds confidence among stakeholders.
• Management Incentive Plans (MIPs): MIPs are vital for aligning the interests of management teams with investors, but they also present complex tax challenges. MIPs and employee loans require extra scrutiny to ensure compliance and avoid adverse tax consequences.

Private equity owned businesses often face distinct tax challenges due to their ownership structure. Additionally, insurers may exclude certain risks from coverage, necessitating proactive strategies to address these gaps well in advance of a sale process.

By focusing on these areas and implementing robust tax governance frameworks, private equity managers can navigate risks effectively, better protecting their investments.

Unlocking UK defined contribution pension capital

Private capital structures often clash with the liquidity needs of UK defined contribution (DC) pension schemes. While government and industry are seeking solutions, hurdles remain in areas like liquidity, valuations, and the treatment of carried interest. For managers able to align with these needs, the opportunity to unlock significant capital flows is immense.

AIFMD II and UK-EU divergence

The EU’s AIFMD II introduces stricter rules, including higher regulatory capital requirements, tighter delegation standards, and limitations on non-core activities. These changes aim to enhance transparency and investor protection but may increase costs and operational burdens, particularly for smaller managers.

In contrast, the UK is charting a more flexible path, focusing on competitiveness. Proposed measures include raising the €500m small AIFM threshold and avoiding sharp increases in regulatory capital requirements. This divergence seeks to attract global fund managers by fostering innovation and reducing compliance barriers.

For fund managers operating across jurisdictions, dual compliance will add complexity, but the UK’s approach may position it as a more attractive destination for private capital, offering a competitive edge in the global market.

The FCA agenda

The FCA is intensifying its focus on how private capital managers approach asset valuations, with a live consultation concluding in Q1 2025. Independence is becoming a cornerstone of valuation practices, with portfolio monitoring teams playing a more prominent role in scrutiny alongside formal governance processes.

The FCA also emphasise speed, clarity, and certainty to build confidence in private markets. Key initiatives include expanding access to capital, fostering diversity, and enhancing data-driven regulation, particularly in ESG.

Regulatory reporting changes

ILPA’s updated quarterly reporting templates, effective January 1, 2026, aim to improve transparency, particularly around leverage and debt, providing investors with deeper insight into portfolio risks. However, feedback from the BVCA highlights that these templates may not be suitable for all investment strategies, especially those with complex structures or heavy debt exposure.

Fund managers will need to adapt their reporting processes to meet these new standards while maintaining flexibility for unique strategies. Collaborating with service providers will be key to ensuring efficient, compliant reporting that meets regulatory demands and supports investor confidence through enhanced transparency.

Retailisation of private markets

The push to retailise private markets, driven by ELTIF reforms, offers fund managers access to a vast new capital pool, particularly through defined contribution (DC) pension schemes. However, this shift comes with challenges including liquidity management and enhanced transparency in valuations.

While opening private markets to retail investors could drive significant growth, fund managers must adapt operationally to handle increased reporting, investor communication, and governance. Successfully navigating these challenges will position managers to benefit from a democratised private markets landscape for long-term growth.

Thriving amidst regulatory and market shifts

The UK’s private markets face a dual challenge: balancing regulatory demands with global competitiveness. The interplay between tax changes, evolving valuation standards, ESG mandates, and expanded reporting requirements demands a proactive approach. Managers that adapt swiftly will position themselves to thrive amidst this dynamic regulatory environment.

For tailored insights into navigating these changes, get in touch with Nick McHardy, Head of Funds ([email protected]) or Ross Youngs, CCO ([email protected]).