KKR: PE could face ‘heightened scrutiny’ as public discourse sours

The private equity giant has said its business could be damaged by allegations of improper conduct or press speculation – whether valid or not.

KKR has warned that the private equity industry could come under greater scrutiny due to the rise of populist political movements in the age of social media.

Such trends have “generated and may continue to generate a growing negative public sentiment toward globalisation, free trade, capitalism and financial institutions, which could lead to heightened scrutiny and criticisms of our business and our investments,” the firm said in its annual 10-K regulatory filing.

“In addition, public discourse and Congressional inquiries in the 2020 US presidential election have elevated the level of focus put on us, our industry and companies in which our funds are invested.”

Private equity has become a key talking point ahead of this year’s US presidential election, with democratic candidate Elizabeth Warren among those pushing for dramatic reforms including additional caps on leverage and profits taxed as income rather than capital gains.

A November report by the US Chamber of Commerce, one of Washington, DC’s most powerful lobbying groups, analysed the potential economic impact of Warren’s Stop Wall Street Looting Act of 2019 if it were to come into effect. In the worst-case scenario, the private equity industry would “cease to exist, companies normally backed by PE would fail, and the national workforce would drop by 26.3 million jobs”, the report found.

The internet and social media, and the increased public focus on business activities and behaviours, increases the risk to the industry of reputational harm, KKR noted in its filing.

The firm, which depends on business relationships and reputation for integrity to attract investors and staff, could be damaged by allegations of improper conduct or press speculation, regardless of whether the outcome is favourable or unfavourable, it noted.

Anti-private equity rhetoric is “probably going to get worse“, Carl Thoma, one of the industry’s founding fathers, told delegates at PEI’s CFOs & COOs Forum in January. The industry is “under attack” and industry representatives need to spend more time in Washington getting to know senators, he added.

The private equity industry is also grappling to understand and limit the implications of coronavirus, or COVID-19. Blackstone, the world’s biggest private equity firm, warned last week that the epidemic could impact the performance of its funds as the effects of the epidemic continue to disrupt the global economy.

KKR’s filing – published in mid-February – noted that health crises such as coronavirus could directly and indirectly affect the firm and its portfolio companies by threatening employees’ well-being, interrupting business activities or supply chains and disrupting travel, among others.