Euro sceptic

The European Parliament’s proposal to regulate private equity seems unlikely to change things much at all, writes Toby Mitchenall.

Yesterday afternoon the European Parliament voted through a significantly watered-down resolution proposing cross-border regulation on both the hedge fund and private equity industries in Europe.

The Economic and Monetary Affairs report, which has been tinkered to the tune of more than 200 amendments since its first draft nine months ago, was originally prompted by MEP and president of the European Party of Socialists, Poul Nyrup Rasmussen.

Toby Mitchenall

Rasmussen was the prime minister of Denmark in 2006 when its national phone operator TDC was the subject of a controversial €13 billion LBO – then Europe’s largest ever – completed by Apax Partners, The Blackstone Group, KKR, Permira Advisers and Providence Equity Partners.

The report, which recognises that private equity and hedge funds “provide liquidity, foster market diversification and market efficiency” in Europe, proposes that among other things, these asset classes should be subject to minimum capital requirements, provide greater transparency and “inform and consult” a company’s employees when its ownership changes hands.

The proposed resolution is a compromise between the Socialist Group in the European Parliament, the conservative European People's Party and the Liberals.

The European Private Equity & Venture Capital Association, the European trade body which has been an active participant in the debate over the report’s content, is right in saying that it is unlikely to affect European private equity operations.

“A number of the legislative demands contained within the resolution are already covered by both international and domestic laws and the industry’s own guidelines,” Justin Perrettson, head of public affairs at the EVCA told PEO.

As we saw in the UK last year with the Walker Report, which after much public deliberation resulted in a voluntary code of conduct, government bodies are reluctant to prescribe burdensome regulation on private equity. When it comes to close scrutiny – away from the scaremongering “locust” type headlines – institutions tend to recognise the value of the asset class.

The debate over the current report, for example, was informed by German academic Oliver Gottschalg, who in November concluded that 91 percent of private equity transactions produced growth-oriented initiatives.

But things have changed since Rasmussen first sowed the seeds of this proposal 18 months ago.

The €13 billion mega-deals and aggressive refinancings, which caught the eye of the media, have now been consigned to the past, at least for now, leaving the less controversial mid-market as the dominant force in the industry.

And in a climate in which banks have suffered crippling sub-prime losses, the capital in private equity coffers has already proved a vital alternative to state bail-outs, as with Lone Star Fund’s recent acquisition of ailing German bank IKB.

Having been passed by the European Parliament’s Economic and Monetary committee, the resolution will now be voted on by the full Parliament before being passed to the European Commission to assess the likely impact of new legislation and propose new laws if necessary.

And while Rasmussen has possibly caused industry figures some concern by calling that this “the end of the regulation-free ride of private equity and hedge funds”, it seems it should have little impact on the industry at all.