Conflicts of interest in private equity

SYSC 10 sets four obligations a firm has to be able to evidence in operation: identify conflicts, prevent or manage them, disclose only where that isn’t enough, and record and report. The review will press on all four.

Identification comes first. Under SYSC 10.1.3R a firm must take all appropriate steps to identify conflicts of interest between the firm, its managers, employees and linked parties, and its clients, or between one client and another. SYSC 10.1.4R sets the test for which conflicts count: a firm treats a conflict as relevant where it or a relevant person is likely to make a financial gain or avoid a loss at the client’s expense, where there is an interest in the outcome distinct from the client’s, where there is a financial incentive to favour one client over another, where the firm carries on the same business as the client, or where it receives an inducement from a third party. In private equity almost every fund decision engages at least one of those five limbs. The FCA expects a firm to identify all its material conflicts, not to report that it has few.

Prevention or management is the second obligation, and the operative words are prevent or manage. SYSC 10.1.7R requires a written conflicts of interest policy, appropriate to the size and organisation of the firm and the nature, scale and complexity of its business, that names the circumstances which constitute or may give rise to a conflict entailing a material risk of damage to clients’ interests, and sets out the procedures and measures for preventing or managing them. SYSC 10.1.8R adds that those measures must let relevant persons engaged in conflicted activities carry them on at a level of independence appropriate to the firm. Identifying a conflict is only the first step. The firm should also have appropriate controls to manage it and be able to demonstrate that those controls were applied in practice.

Disclosure is the third obligation, and the one firms most often misapply. Where the organisational and administrative arrangements can’t ensure, with reasonable confidence, that risks of damage to clients’ interests will be prevented, the firm must clearly disclose the general nature or sources of the conflict, and the steps taken to mitigate it, before it does business. The FCA has said plainly, including for MiFID firms at SYSC 10.1.7AR, that disclosure is a measure of last resort for use only where the firm’s arrangements can’t manage the conflict, and that leaning on disclosure is itself a failing. A line noting that “the manager may have conflicts” isn’t management; generic disclosure suggests active management was missing.

Record and report closes the set. The firm has to keep and regularly update a record of the kinds of service or activity in which a conflict entailing a material risk of damage has arisen or may arise, and the written policy itself must meet the content requirements of SYSC 10.1.11R. Senior management must receive a written conflicts report, frequently and at least annually, with the report to the management body now anchored at SYSC 10.1.6AAR. Over all of it sits Principle 8: “A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.” For an alternative investment fund manager the AIFMD conflicts requirements run in parallel, obliging the firm to identify, prevent, manage, monitor and disclose conflicts, to segregate tasks and responsibilities that may be incompatible, and to maintain and operate effective conflicts arrangements.

The FCA is consulting, through CP25/36 on client categorisation and conflicts of interest, on rationalising and streamlining the SYSC 10 rules. Two points matter for a fund manager. The FCA proposes to keep the substance and the burden while harmonising the standard to “all appropriate steps” at SYSC 10.1.3R and dropping the older “avoid” language as ambiguous, so the duty is correctly described as a duty to prevent or manage conflicts rather than to avoid them. The drafting also adds express references to “investors” alongside “clients”, which preserves the full-scope manager’s conflicts obligations to the fund’s underlying investors and not only to the fund as its client. The change strips out complexity firms have used as cover, leaving the underlying expectation, identify and manage and evidence it, in plainer view; it isn’t a loosening of the standard. These provisions are proposals at consultation stage, and the live rules should be cited from the current SYSC 10 text.

Both reviews use the same method, a questionnaire followed by targeted follow-up, and both probe the gap between the policy a firm documents and the practice it can evidence. Having looked at valuation governance, the regulator has moved to the incentives that pull on those valuations and on every other fund decision.

The firms most exposed have several traits in common. They run multiple business lines where one team raises, deploys, values and exits across vehicles. They operate continuation funds and GP-led secondaries where the manager sits on both sides of a trade. They run co-investment programmes where allocation is scarce and raises fairness questions between investors. Or they’ve grown faster than their control function, carrying a conflicts policy written at authorisation and not touched since.

What the FCA pursues, and what LPs’ operational due diligence teams test with as much force, is whether real, recurring conflicts get caught at the point of decision and managed in a way that leaves documented evidence behind. The list below maps the conflicts that draw supervisory attention to the SYSC 10 obligation each engages and the control that evidences management.

1. Allocation of investment opportunities. Where a deal fits more than one fund, or a fund and a co-invest pool, the manager decides who gets it and how much, which engages the SYSC 10.1.4R limb on favouring one client over another. Evidence the FCA looks for: a written allocation policy with objective criteria, plus a contemporaneous memo for each deal showing how those criteria were applied, including the deals that went to one fund over another and why.
2. Co-investment allocation. Co-invest is scarce and often offered at reduced or no fee and carry, which turns its distribution into a reward the manager hands out. Same 10.1.4R limb on favouring one client over another, compounded by the firm’s own incentive to favour strategically important LPs. Evidence: a co-investment allocation framework, disclosure of the basis to all investors, and a record of offers made and declined.
3. Fee and expense allocation. Which costs fall to the fund and which to the manager, how broken-deal costs split, how portfolio monitoring and director fees offset against the management fee, and how shared costs across funds are apportioned. The limb is financial gain at the client’s expense. Evidence: an expense allocation policy, an audit trail for each allocation judgement, and reconciliation of fee offsets to the LPA.
4. Cross-fund transactions, continuation funds and GP-leds. The manager sets the price and terms on a transaction between vehicles it controls, or moves an asset out of a primary fund into a continuation vehicle it will keep managing and earning on. The limb is an interest in the outcome distinct from the client’s. Evidence: independent valuation or a fairness opinion, recusal of conflicted decision-makers, LPAC consent recorded, and a rationale and process documented to a standard a buyer’s counsel would accept.
5. Related-party and affiliate arrangements. Services the fund or its portfolio companies buy from the manager’s affiliates, operating partners or in-house advisory teams. This is financial gain at the client’s expense, with an inducement dimension. Evidence: arm’s-length benchmarking, disclosure, and LPAC oversight of related-party dealings.
6. Valuation-linked conflicts. Marks drive fees, carry crystallisation and the fundraising track record, the subject of the March 2025 valuation review. The limb is financial gain at the client’s expense. Evidence: functional independence in valuation, per-asset conflict mapping, and the governance the valuation review describes.
7. Time, attention and fundraising while deploying. A manager raising fund IV while still deploying fund III has an incentive to flatter the existing portfolio, and its senior people have finite attention across vehicles. The limb is an interest distinct from the client’s. Evidence: deployment-pace and key-person monitoring, and controls on how unrealised performance is used in marketing.
8. Inside information and MNPI. Deal teams routinely hold material non-public information, acutely so on public-to-private transactions, which creates market abuse and cross-fund information risk. Here the rules are the SYSC 10.2 information barriers and UK MAR. Evidence: wall-crossing and insider-list discipline, restricted lists, and PA-dealing controls that are operated, not merely written.
9. Side letters and most-favoured-nation terms. Preferential economic, information, liquidity or co-invest rights given to some investors create conflicts with the rest of the fund. The limb is favouring one client over another. Evidence: a side-letter register, an MFN election process that’s actually run, and disclosure of the categories of preferential terms.

The through-line is the one the valuation review drew. Each recurring conflict has to be caught and recorded at the point of decision.

A conflicts framework that answers SYSC 10 and the coming review has six working parts.

Start with a policy that names the firm’s own conflicts, not generic ones. It should describe the conflicts that arise from this firm’s strategies, fund structures, affiliates and investor base, applying the five-limb test of SYSC 10.1.4R to the real business. A generic policy won’t reflect your firm’s actual conflicts, and reviewers can see that.

A living register tied to decisions does the operational work. It gets updated as conflicts arise at deal, allocation, transfer and valuation level, with each entry recording the conflict, the SYSC limb, the control applied, who decided, who recused, and the outcome. It is one of the first documents requested and often one of the weakest. Investment allocation and expense allocation are likely to receive particular attention because both involve decisions that directly affect investors' financial interests. A written policy is important, but firms should also retain a contemporaneous record explaining how the policy was applied in each material case. Supervisors and investors are generally interested in how individual decisions were made, rather than the policy in isolation.

Disclosure has its place, but the regime treats it as a last resort, used where arrangements can’t otherwise manage the conflict, and it has to be specific enough for the investor to understand both the conflict and the mitigation. Boilerplate that “the manager may face conflicts” fails on both counts. Where disclosure is the route chosen, the file should show why management alone wasn’t enough.

LPAC consent, fairness opinions and independent valuation are strong mitigants for the transactional conflicts (continuation funds, cross-fund trades, related-party deals), but only where the process is real: full information to the committee, conflicted parties recused, and the consent and its basis recorded.

Finally, senior management should receive regular reporting on conflicts. SYSC requires conflicts reporting at least annually, and the report should enable the governing body to assess whether the firm's conflicts framework is operating effectively in practice. It should cover the material conflicts identified during the reporting period, how they were managed, the operation of side letter and most favoured nation processes where relevant, investment and expense allocation decisions, and any exceptions or breaches requiring further action.

Record quality depends on content, not format. A conflicts register may appear comprehensive, but it will provide limited assurance if it records only categories of potential conflicts without demonstrating how those conflicts were managed in practice. Firms should ensure that material conflicts arising from individual decisions are recorded together with the controls applied and, where appropriate, cross-referenced to the contemporaneous documentation explaining how the decision was reached. That record is likely to be of greater value during supervisory engagement than a register which simply catalogues potential conflicts.

This insight is provided for general informational purposes only and doesn’t constitute legal, investment, or regulatory advice.