Investors would still push
Should efforts to ease private equity regulation be successful, investors would still push their general partners to act as if they were regulated, said Bill Mulligan, San Francisco-based president of Cordium, a regulatory compliance firm for the financial and banking industries. Some of his firm's clients that are currently exempt from regulation have the same information reporting and processes as they would have if they had been regulated because it is required by investors, Mr. Mulligan noted.
If Congress votes to deregulate the private equity industry, there will be pushback from private equity firms' investor base, Mr. Mulligan said.
David Bailey, co-founder, group head of marketing and communications, in the London office of Augentius Group Ltd., a service provider for private equity and real estate managers, said regulatory oversight of private equity firms in the U.S. has been good for the industry overall.
“The U.S. had been an anomaly in not having regulatory oversight,” Mr. Bailey said. “Bearing in mind what the SEC has found, it has probably been healthy for the industry that the SEC has been involved.”
Since 2012, the SEC has prosecuted 11 enforcement actions against private equity players, including Fenway Partners LLC and the Blackstone Group. But SEC Chairman Jay Clayton has signaled in public statements that he is focusing less on enforcement than on market reform.
“There is widespread speculation among those in the private equity industry that the next iteration of the SEC will be friendlier to the private equity industry than the past administration,” said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC. “It's not just the regulations, but also the interpretation and enforcement of the laws and regulations that are at play.”
The SEC's actions were not “out of kilter” with many other countries, Mr. Bailey said. In the U.K., private equity managers are held to a stringent regulatory regime in which regulators inquire into the manager's track record, previous experience, back-office technology and the number of people the manager expects to employ, among other factors, he said.
Guernsey, Luxembourg, the European Union and Singapore all have more stringent regulatory regimes for private equity than the U.S., Mr. Bailey said. China is currently considering strengthening its regulatory oversight of private equity, he added.
“This (bill) could be good for very large U.S. managers, but it could have a negative effect on smaller U.S. managers if investors are not given the regulatory assurances,” Mr. Bailey said.
the only move afoot to lessen regulation for the private equity industry.
The National Venture Capital Association is trying to get growth equity private equity firms exempted from SEC oversight. They would be covered by the CHOICE Act if it were to become law. Venture capital firms already are exempt from SEC oversight.
Another bill — the Investment Advisor Modernization Act — didn't pass Congress in the last legislative session but is expected to be filed with a new sponsor this session. The 2016 version of the bill had provisions that would have eliminated the requirement that private equity managers file Form ADV 2A, a summary of fees, expenses and carried interest; investment strategies; risk of loss; and other financial information. It also would have exempted friends and family co-investment vehicles from the annual fund audit and surprise examination requirement.
While not taking a position on the CHOICE Act, NVCA executives are pushing the Trump administration and others to exempt growth equity private equity firms from registration as investment advisers.
“Forcing growth equity firms to become registered investment advisers is a huge burden with little public policy benefit,” said Ben Veghte, NVCA spokesman, in a written statement in response to questions. “These late-stage venture capital firms are forced to spend significant time and financial resources complying with a regulatory regime that was never intended for their business model.”
The NVCA defines growth equity firms as those that among other things tend to have investments with little or no leverage, returns obtained through company growth and usually no additional financing rounds expected until exit. Such private equity firms also invest in companies that are often founder-owned and/or managed.
“We are engaged in ongoing conversations with the Hill, the Trump administration and regulators on how we can right-size the RIA regulatory regime by exempting critical capital formation activities for emerging growth companies from triggering the onerous registration requirement,” Mr. Veghte said.