Andrew, your Greenwich, Conn. firm manages a private equity with $500 million in assets. Why are you working to reverse, or at least change, the Dodd-Frank registration requirements on private equity firms?
The unintended consequence of Dodd-Frank is to create a burden that goes well beyond financial costs. The law was established to address fundamentally two issues: one is systemic risk, and the second is investor protections. Regarding systemic risk, no one—not even the most aggressive regulator—has been able to make a case for how private equity funds contribute to systemic risk. If there was any evidence that private equity contributed to systemic risk, it would have occurred in 2008 and 2009 when markets melted down. But private equity wasn’t implicated. And the reason is that private equity is largely de-linked from the public markets.
On the investor protection front, private equity investors are very sophisticated institutions—pension funds, endowments, foundations—that have always relied on enormously intrusive due diligence. And, if you ask these institutions whether they would benefit from the SEC’s registering private equity managers, they would laugh.
How will these regulations impact your firm?
The first thing is just getting registered and in compliance. That’s a very serious cost for firms like mine that are, frankly, small businesses. Our first task will be to hire or appoint a chief compliance officer, and that’s not a low-level position. That person’s job is to ensure that every employee complies with the compliance manual, which is a very extensive document designed to codify an array of activities at the firm. This involves complying with, in essence, the Investment Advisers Act, which is tailored to professionals giving advice to retail investors about public securities transactions. This is like asking a dog to wear a two-legged suit. It’s just a bad mismatch and it’s costly in the extreme.
How did VC get an exemption from Dodd Frank, but not private equity?
The senate version, which was Dodd’s bill, had both VC and private equity exempted. But in conference committee, private equity was thrown under the bus and VC was not. There is absolutely no logic I can think of for why VC should be exempted and private equity should not.
You told Congress that the SEC has “only a limited knowledge of private equity firms.” Why did you say that?
I met with the SEC’s commissioners in Washington in February, and each of them said they have very limited knowledge of private equity. It’s not because they are ill-informed, but because they’ve never regulated private equity firms.
The SEC is under enormous pressure. They have more than they can handle without adding another 1500 firms to their oversight responsibilities. The SEC should focus on areas where there is systemic risk and where investor protection needs to be assured by a regulator.
Is there any reason the public shouldn’t know basic information about firms like yours?
Well, I’d answer first by saying we are private firms. The transactions we engage in are almost always confidential and bound by confidentiality agreements. Our ability to operate in the private markets is essential to what we do.
That said, one of the things I have been asked by many senators and representatives, particularly Democrats, is whether would I be averse to a revision that would require some “census-level reporting,” so that a public regulator would have knowledge of who’s in the business, what the aggregate assets under management are, and where they can be contacted. I don’t think there’s any problem with that. I think most private equity firms would say, “well, we may not want to do it, but that doesn’t create a burden,” and having that sort of database at the SEC is not particularly controversial from my perspective.
Edited for clarity