Private Equity Council supports PE firm registration with SEC
WASHINGTON, DC, July 15, 2009 – In testimony presented to the Senate Subcommittee on Securities, Insurance, and Investment, the Private Equity Council (PEC) today said it supports Obama Administration and congressional proposals to require private equity firms to register as investment advisers with the Securities and Exchange Commission.
Appearing on behalf of the PEC, Mark Tresnowski, managing director and general counsel of Chicago-based Madison Dearborn Partners, said that although the private equity industry does not cause systemic risk, “we are mindful that excluding any asset class from the new regulatory regime could contribute in some way to diminished confidence in the effectiveness of the new regulatory regime and therefore we support the casting of a wide net.”
Tresnowski noted that the Obama Administration articulated three fundamental factors that trigger systemic risk concerns: 1) The impact that a firm’s failure would have on the financial system and economy; 2) The firm’s combination of size, leverage (including off-balance sheet exposures) and degree of reliance on short-term funding; and 3) The firm’s criticality as a source of credit for households, businesses, and state and local governments and as a source of liquidity for the financial system.
“Private equity contains none of these systemic risk factors and thus should pose little concern for policymakers seeking to develop a new regime to guard against catastrophic, cascading financial shocks,” he told the Subcommittee.
Tresnowski identified a series of reasons why private equity is not a cause of systemic risk: private equity funds themselves have little leverage; private equity firms are not deeply interconnected with other financial market participants; they rely on long term, not short term funding; they are not a source of household credit; and the borrowings of their portfolio companies represent a small fraction of the overall credit market.
While supporting registration generally, Tresnowski said it is not a trivial matter and would impose “considerable administrative and financial burdens associated with record keeping and audits as registered investment advisors” especially for smaller firms. Accordingly, he cautioned that any new reporting requirements for investment firms and other financial institutions should be carefully calibrated “so the burdens are tailored to the nature and size of the individual firm and the actual nature and degree of systemic risk it may pose.”
Private Equity Council President Douglas Lowenstein is scheduled to present similar testimony before the House Financial Services Committee at a hearing on July 17. Both committees are considering proposals to dramatically recast the way that the federal government regulates financial market players, including large publicly-traded bank corporations and private pools of capital.
Among the proposals advanced by the Obama Administration is one that would require private investment firms to register as investment advisers with the SEC, triggering a range of disclosure and reporting requirements about the size and nature of their holdings and investments.
About the Private Equity Council
The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).
