Private equity firms may balk at being called unimportant. But it’s a small price to pay if they want to get out from under registration requirements mandated by Dodd-Frank.
“These are not systemically important entities by any stretch of the imagination. And they only market to highly sophisticated high net-worth clients,” says Representative Jim Himes, a Democrat who’s co-sponsoring a bill that would remove these requirements.
The Small Business Capital Access And Job Preservation Act (HR 1105), introduced by Republican Representative Robert Hurt last month, would remove regulations that require private equity managers to register as investment advisors with the US Securities and Exchange Commission, provided the fund is levered at a ratio of less than 2:1.
“The problem here is – [and] I’m more than aware that standing up for private equity partnerships is not necessarily popular – the fact of the matter is this imposes all kinds of obligations on the partnerships that don’t make sense,” Himes says (private equity’s unfavourable showing in the public spotlight during the 2012 presidential election may have been why Republicans failed to bring a previous incarnation of this bill to the floor, he adds).
Himes points out that losses generated by the possible collapse of most leveraged buyout investments would pale in comparison to the reported $6.2 billion lost by JP Morgan in the infamous London Whale trades, a fiasco that has nonetheless failed to have any great impact on the overall economy.
“I’m willing to stipulate that there might be a half dozen to a dozen truly large private equity firms that one would want to monitor more carefully,” he says. “But a lot of those are already registered … Blackstone’s publicly traded, I believe KKR is registered; a lot of the big ones in order to access the equity capital markets have registered on their own.”
Unfortunately, the case for lifting registration requirements probably wasn’t helped by a Bank of England report that was published around the same time as Hurt introduced his bill.
The Bank’s report claims that debt maturities on pre-crisis leveraged buyouts could pose a threat to the UK’s financial stability. Private equity-backed businesses in the UK are servicing £160 billion (€185 billion; $239 billion) of debt, it said, £32 billion of which needs to be refinanced by 2015. The argument was that this refinancing wall could force an unhealthy number of defaults, posing a risk for banks and issuers.
Although the report confined its conclusions to the UK, it did succeed in generating further headlines about the systemic risk posed by leverage levels on PE deals globally – an issue that has receded recently, due to the widely-predicted wave of post-crisis defaults failing to materialise.
But Himes thinks the risks are overstated. “Don’t get me wrong here; I’m not saying private equity should be subject to zero oversight. What this bill is saying is that [Dodd-Frank mandated] registration … is just a very awkward fit for this industry. It would be good practice if Congress and the regulators, before they imposed a fairly significant regulatory regime, could point to a reason … But when you say: ‘Wait a second, what do we point to when you say that private equity firms should be registered?’, [they] can’t point to anything.” ?