The private equity industry performed a stunning volte-face at a recent conference, when it invited Arthur Levitt, the former chairman of the SEC, to give the keynote address on regulatory issues. Many in the asset class have traditionally resisted all calls for further regulation and the imposition of corporate governance standards from above.
As an evangelist for Sarbanes-Oxley, Levitt was never likely to tread on egg-shells when it came to the lightly regulated private equity world, but the content of his speech was quite startling and left many in the audience gaping open-mouthed at its scope and implications.
As it turned out, conference organiser EVCA was prescient in its booking, as the speech also coincided with the announcement of a major investigation into the industry by the UK’s Financial Services Authority.
Levitt began with some impressive figures on the phenomenal growth of the asset class during his long career.
“When I started on Wall Street 40 years ago the PE market did not exist,” he said. “In 1993 there was US$20bn committed to PE; now there are 2,700 funds that have raised more than half a trillion dollars.”
He continued: “The way the industry is developing, I believe that – by the end of the decade – we will see a consolidation to a handful of global, brand-name firms; witness larger deals entailing consortia of firms; and watch as millions of individual investors discover that they are exposed to this asset class.”
According to him, the amount of new stakeholders that will be affected by this enormous growth will fundamentally alter the nature of disclosure and accountability in the asset class.
“While private equity will remain technically private, its actions will become the public’s concern,” he said. “Various stakeholders will lay claim to examining private equity’s actions: why are you closing this plant or factory – or slashing jobs? Who bought our country’s electric utility, energy reserves, or port operations? In what exactly is my retirement invested – and who is doing the investing?”
What was even more alarming for many private equity firms present was his declaration that Sarbanes-Oxley would become the regulatory platform for private companies.
“[It] is now the gold standard, and while not mandatory for private companies, many of its provisions will be the benchmarks by which our limited partners and others looking at private equity judge our actions. In that, it’s the standard to which we should aspire.”
Many in European private equity would disagree.