European Regulators Eye Private Equity
The joint statement issued in London by the leaders of the Group of 20 last week expressed a commitment to bring “all systemically important financial institutions” within the purview of their respective financial regulatory and oversight regimes. Notably, the statement singled out hedge funds for additional regulation, but made no mention of whether private equity funds would also be subject to greater scrutiny by financial authorities. A week after the breakup of the G-20 meeting, it appears that elected officials and members of the investment community in Europe remain divided as to whether private equity funds warrant increased regulation.
The Financial Times reported that the European Commission announced a one-week delay in the issuance of its highly anticipated proposals for new regulations governing hedge funds and private equity funds. (The proposals are now scheduled to be released on April 29.) Although European Commission representatives attributed the postponement to a bureaucratic bottleneck, the Financial Times suggested rumors were afoot that leaked drafts of the Commission’s proposed legislation provoked disapproval by some European government ministers and members of the private equity community. Jim Brundsen of the European Voice, which reviewed a draft of the proposal, writes that the legislation would require private equity funds with assets under management in excess of €250 million to maintain a minimum capital requirement of €125,000, plus 0.02% of the amount by which the funds’ portfolios exceed €250 million. Funds whose assets remain below the €250 million threshold would be excluded from the new regulatory requirements.
Across the Channel, the Wall Street Journal reports that both the U.K.’s financial regulator, the Financial Services Authority (FSA), and the British Treasury Ministry have expressed less interest in tightening regulation of private equity funds than their Continental counterparts. British officials’ more laissez-faire attitude towards private equity seems to stem from their conclusion that private equity funds are not “too big to fail.”
The FSA’s Turner Review, a report issued in March that recommended regulatory responses to the financial crisis, argued that since “hedge fund activity in aggregate can have an important procyclical systemic impact,” many such funds should be subject to capital, liquidity, and other restrictions. The Turner Review’s policy proposals, however, did not identify private equity funds as financial institutions that pose system-wide risks. In this respect, at least, the Turner Review seems to agree in principle with The European Private Equity and Venture Capital Association’s (EVCA) assertion that neither private equity funding models nor the portfolio companies in which private equity typically invests pose systemic risks to financial markets. (The EVCA’s 300-page submission to the European Commission and the European Parliament can be found here).
Of course, it’s still too early to tell how these legislative proposals will shake out in the end. But at this stage, one thing seems clear: the decision whether private equity funds should be more strictly regulated will most likely turn on public officials’ assessment of the likelihood that the collapse of a large private equity fund or the insolvencies of multiple portfolio companies would result in unacceptable externalities.
Update: EU Private Fund Regulation: The Anglo-Continental Divide on Private Equity
