Private Equity Briefcase
March 31, 2009
Private Equity Under New Law
It’s about time we had more rules to govern the U.S. financial system—but every corner of it?
Sure, there’s plenty of blame to go around for the collapse of the financial services industry, so some of it must surely be assigned to the deep-pocketed overlords of private equity who, let’s face it, destroy corporate jobs and strip companies of assets. Although that out-of-date notion from the 1980s has since been disproved in a study sponsored by noted Harvard finance professor Josh Lerner, the buyout industry must nonetheless take its share of blame for world economic malaise.
Global private equity firms must face regulation like every other corner of the financial services industry. At least that seems to be thinking of certain good-intentioned folk like Treasury Secretary Timothy Geithner.
Never mind that the Blackstone Group, the Carlyle Group or Kohlberg Kravis Roberts & Co.—three high-profile private equity firms regularly vilified in the media—weren’t responsible for leveraging up U.S. investment banks, developing the securitization market, massive hedge fund redemptions or the credit crunch. Under the new regulatory plans being proposed, the traditionally secretive Masters of the Private Equity Universe will be required to register their firms with the Securities and Exchange Commission. That, in turn, will set the stage for further regulation and possibly additional disclosure.
Now, don’t get me wrong. As a reporter covering private equity I would welcome just a tad more transparency from the industry and the opportunity to review a firm’s internal rate-of-return fund performance, for instance, in more detail. Even so, the buyout universe is already somewhat semi-transparent since the financial performance of many limited partnerships is posted on the Web sites of various pension funds.
Let’s be fair, though, when it comes to regulation. Private equity firms have bootstrapped companies and provided growth capital, keeping some businesses alive and helping others to thrive. And, while some of the larger financial sponsors run capital markets operations, I hardly think they need to be contained because of the systemic risk they pose or the lack thereof.
Hats off to Carlyle co-founder David Rubenstein, who reportedly said in an industry event in New York, “We’re not going to be able to stand in the way of that speeding train.”
Rubenstein and his industry peers will likely figure out how to board the train. At the end of the day they’ll stay focused on building corporate value and delivering the best possible returns for their shareholders. It’s a mission in the past that has helped businesses grow and add jobs. And, that’s not exactly a bad thing to pursue in this hanging-by-a-thread economy.
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