Friday Letter Combating the clouds

A crucial vote on EU transparency requirements was delayed by Eyjafjallajokull this week, but regulatory overhaul in the US marches on.  

The EU’s JURI Committee on legal affairs was scheduled to meet this week to vote to establish the European Parliament’s legislative position on the future transparency requirements for alternative investment funds. But the meeting was cancelled at the last minute as clouds of ash from Icelandic volcano Eyjafjallajokull grounded flights across Europe.

The current draft of the EU’s Directive on Alternative Investment Fund Managers would impose a great deal of disclosure requirements on fund managers, including providing regulators more extensive detail on their use of leverage. A study of the AIFM’s potential impacts found that one-off compliance costs could rise by between €110 million and €2.2 billion in total for the private equity, hedge funds and venture capital industries.

Unfortunately for EU GPs, the reprieve will be brief – the JURI vote has already been rescheduled for 28 May.

Meanwhile, the US Senate is in the process of debating the financial regulation overhaul this week as well, and there is no ash cloud to delay them.

A private equity lobbying group in the US, the Private Equity Council, is gearing up to fight parts of that legislation that would hurt private equity firms by expanding its membership.The last version of the Senate legislation published exempted private equity from an onerous requirement that alternative investment fund managers register with the Securities and Exchange Commission as investment advisors. But since then conflicting messages have come out of the Senate, and it’s unclear whether this exemption will survive. A revised version of the legislation has not yet been published.

Currently, the PEC’s members are 12 large private equity firms including Blackstone, Carlyle and KKR. To increase its effectiveness in lobbying US lawmakers, the PEC is now courting middle market firms, too. It seems the story buyout behemoths have to tell will not always connect with lawmakers who want to support policies that favour everyday people, small business owners and historically disadvantaged participants in the economy. Lawmakers are especially receptive to messages that emanate from their own voting districts, not Wall Street.

Ideally, the PEC wants to become the official advocacy body for all growth equity and buyout firms, with the National Venture Capital Association speaking for VC firms. We have long argued that US GPs have been missing a beat by failing to speak with one voice, be it on Capitol Hill or in America’s living rooms.

Such a status would allow the PEC to unleash private equity firms of all sizes and strategies to argue for a more benevolent regulatory regime, and to illustrate how laws intended to fetter Wall Street titans may unintentionally end up damaging medium-sized firms that invest in medium-sized businesses.

Convincing the hundreds of firms scattered across the US that they should join the effort may prove to be a challenge, however. Buyout firm GPs in particular have spent the last several decades getting on just fine without paying dues to a Washington lobbying outfit, and membership in the PEC costs $25,000 per year for firms with $8 billion or less in assets under management.

Numerous regulatory proposals currently under review in Congress would cost private equity firms a good deal more than that, though. The PEC needs smaller GPs and these smaller GPs may discover that they need the PEC.