The risk for debt incurred in leveraged buyouts is on the portfolio companies, not to the economy as a whole, and the total amount of indebtedness is too small to present a systemic risk, said a private equity industry lobbyist, who asked not to be identified.
“We really feel this would be a regulation aimed at mitigating risks in which the venture capital industry largely does not play a part,” Emily Mendell, a spokeswoman for the National Venture Capital Association, Arlington, Va., said in an interview. “This is a time the country should be supporting venture capital firms because we're in the business of creating new companies and new jobs, which is what the country needs right now.”
In a statement, Richard H. Baker, president and CEO of the hedge fund industry's Managed Funds Association, Washington, said: “While it has been widely acknowledged that hedge funds were not the root cause of the current financial crisis, MFA understands and supports the need for policymakers to take a broad look at market participants including private pools such as hedge funds, private equity funds and venture capital funds. MFA shares the commitment to a course of action that seeks to restore financial stability and investor confidence, and we are in support of smart regulatory reform.”
The argument that venture capital and, perhaps, private equity, should be excluded from the regulatory requirements has elicited sympathy. “It's a stretch to require reporting by (venture capital),” said Robert E. Litan, a senior fellow at the Brookings Institution, a Washington think tank. “They don't present a systemic risk.”
John W. O'Brien, adjunct professor and faculty director of the masters in financial engineering program at the Haas School of Business at the University of California at Berkeley, would give a pass to both private equity and venture capital.
“I don't think private equity and venture capital have been an important part of the problem, frankly,” Mr. O'Brien said. “It's mainly been the leverage and rapid-trading strategies, and those strategies are primarily housed in hedge funds. I don't think Congress has a clear understanding of the problem so they wrap everybody into the net. When they raid a whorehouse, they take the piano player as well.”
But Leon Metzger, a lecturer in finance at the Yale School of Management, New Haven, Conn., and former vice chairman of hedge fund Paloma Partners Management Co., Greenwich, Conn., said federal policymakers are being cautious to ensure they have the tools needed to prevent another financial meltdown.
“There's always the risk of something happening,” Mr. Metzger said. Regulators “just want to be able to reserve the right to shut them down if they need to,” he said, referring to private equity and venture capital firms.
James Gattuso, a senior fellow for the Heritage Foundation, a conservative think tank in Washington, said it is a mistake for the government to try to regulate even hedge funds.
“If it (the federal government's regulatory intervention) leads to rules that discourage the funds from taking risks, then the funds may get lower returns, and that will hurt the economy as a whole,” Mr. Gattuso said. “The economy will be looking to sources of capital such as this for the recovery. You don't want to discourage investment; you want to encourage investment.”
Hartley Rogers, chairman of Hamilton Lane Advisors LLC, a private equity advisory and investment firm in Bala Cynwyd, Pa., said narrowly tailored disclosure requirements would not be burdensome. “If there's so much transparency required that it becomes onerous to provide, then that's an issue,” he added.
Yale's Mr. Metzger said he didn't think the proposal would cause too much fuss for the funds, at least from Mr. Geithner's description of the requirements thus far.
“It's not a big deal,” Mr. Metzger said. “It sounds like the government will step in if there's systemic risk, and that's not such a bad idea. Of course, the devil's in the details.”
For some hedge funds, the Obama administration's proposal is moot because they've already registered with the SEC. In fact, Mr. Baker of the Managed Funds Association said more than half, representing 70% of total assets under management, have done so.