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 Now that private equity and venture capital firms know that they're definitely part of the administration's sweeping "rules of the road" overhaul of financial regulation, the question is, how heavy will be the government's hand on each asset class?Following the release of President Obama's new regulatory framework Wednesday, the lobbying groups for both venture capital and private equity had cautious but varied reactions that closely followed along the lines of other financial lobby groups. As The Deal's Bill McConnell and Donna Block write: With copies of the president's plan in their hands hours before an early afternoon speech to formally unveil his proposals, industry lobbyists and other interest groups were praising the plan in principle while condemning many of its most important provisions. The pressure to alter the plan will complicate the legislative leaders' stated goal of enacting a bill this summer. (Deal Pipeline subscribers can read the full story here.) Still seeking to shed its "Barbarians at the Gate" reputation, private equity isn't exactly up in arms over requirements to register with the Securities and Exchange Commission, perhaps feeling that things could have been worse. The Private Equity Council, which represents 10 of the largest buyout shops, said it welcomed reform, even if it added a burden to its members. "The plan calls for private equity firms to register as investment advisers with the Securities and Exchange Commission," Douglas Lowenstein, president of the Private Equity Council, said in a statement. "We support this proposal, even though it will result in new regulatory oversight for many private equity firms." The PEC had no comment beyond its official statement, but Lowenstein is on record as saying it will take a considerable amount of time for buyout shops to rehabilitate the industry's reputation, which took a beating before and after the credit crisis began. The growing number of PE-backed companies filing for bankruptcy has also done little to enhance the industry's popularity. (See the Dealwatch of PE-backed bankruptcies.) The lobbying group may not have had a comment, but one source within the industry charged with examining how the new regulation will affect buyout shops felt there was no reason for alarm, since it appears that the administration is primarily going after hedge funds. "The [reporting] requirements may vary across different pools, which is positive for the [LBO] industry," the source said. If there is one area that both venture and buyout firms will be pressing their case with Congress its sure to be the subject of exactly what information needs to be collected and disclosed, as both VC and PE are wary of getting lumped in with hedge funds who are likely to face comprehensive reporting requirements on their equity, debt and particularly derivatives positions. With regard to reporting requirements the administration's proposal says: all investment funds advised by an SEC-registered investment adviser should be subject to record keeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements...Some of those requirements may vary across the different types of private pools. The regulatory reporting requirements for such funds should require reporting on a confidential basis of the amount of assets under management, borrowings, off-balance sheet exposures, and other information necessary to assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability. The VC industry seems confident it won't be declared a "systemic threat," but some venture capitalists fear they'll get swept up in a regulatory wave aimed at swash-buckling hedge funds that fails to take the unique nature of their business model into account. Both VC and PE firms will be certain to try to head off an effort by regulators to get information on the performance of their portfolio companies and the internal rate of return on their investment funds. "We're worried that venture capital will get swept up in regulation that's clearly meant for the hedge fund industry," said Emily Mendell, vice president of strategic affairs at the NVCA. "Our concern is that this may be symptomatic of the way regulation has befallen our industry before, as in the case of Sarbanes-Oxley." The Private Equity Council's Lowenstein also commented on the subject, saying, "while we and most experts agree that private equity firms do not create systemic risk, we also support the concept of data collection from market participants and we look forward to reviewing more detailed proposals as the legislative process unfolds." Also left unspecified was a possible threshold for how large a firm needs to be, or how much capital under management it has to have before it's required to register. This could be particularly important for venture investment as regulation could conceivably start including angel investors -- who play an increasingly important role in the startup ecosystem. Together -- reporting requirements and size thresholds -- could present a daunting problem for small middle-market LBO firms and many venture capital shops, which often consist of only a few general partners managing hundreds of millions of dollars. A three-partner firm could quickly find reporting requirements put an onerous administrative burden on it. Wth the measure headed to Congress -- along with healthcare and environmental reforms -- chances are that even the most sympathetic congressperson will be short on time to listen. But as was shown with Sarbanes-Oxley, once legislation is passed it's difficult to get it fine-tuned. As the NVCA's Mendell put it, "It's a slippery slope." - George White See Deal Pipeline story on regulatory reform (subscription required) See financial reform plan See Dealscape post on Lowenstein's comment on PE's reputation See press release from the Private Equity Council See NVCA press release See the Dealwatch of PE-backed bankruptcies See Dealscape post on the Fed's new role See more Dealscape posts on regulation
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