What regulatory issues are still a little under the radar with your members?
While Dodd-Frank wasn’t aimed at the private equity and growth capital industries there will be very important rules and regulations that impact directly our ability to operate, and to create value. One example would be rules aimed at banks that were put in place under Dodd-Frank to address swap positions. The implementation of that rule could affect entities that are not banks, including end-user companies that are owned by private equity. Making sure that rule is implemented in a way that is consistent with the legislative intent of Dodd-Frank is in our interest and something the PEGCC is actively engaged on.
Why are swaps important to portfolio companies?
Lots of industries use swaps to hedge risk. So if you’re an energy company and natural gas prices are important to you, you essentially may need to hedge natural gas prices as part of your regular operations. If you were to consolidate all the swap positions of all KKR owned companies you could limit the ability of those portfolio companies in a way that no one possibly intended. There’s an ongoing dialog with the CFTC (U.S. Commodity Futures Trading Commission) over how swap positions will be ultimately regulated. This was not a rule that was aimed at the private equity industry. But how that’s decided will have real implications for real companies in which private equity invests; a whole lot of end-user companies could be affected by this. And so members of the industry who don’t appreciate that could be surprised in a negative way that we think we can avoid because of the good work of the PEGCC.
What else is under the radar?
Another example is there are going to be rules put forward with respect to compensation. They’re also aimed at banks. Private equity has a compensation model that is very much consistent with the kinds of approach that regulators want to see, which is to say, sponsors have skin in the game, and their returns come over a longer period, not a shorter period. There are incentives for patient capital in our compensation model. That having been said, the details of that rule are very important, and something that the PEGCC is working on. There are also proposals in Europe that could have the effect of discriminating against non-European managers. The PEGCC is working on that as well.
What’s another big priority for the council this year?
Our job is first and foremost to serve the members of the council in a way that they find value-adding. They are contributing dues, and we want to make sure there’s a good ROI on those dues. That means we provide them with information. That means we build a community of best practices in areas like governance. That means we provide a voice and a discussion with policy makers.
What’s the goal for expanding PEGCC membership?
We want to continue to provide a very good return on invest for private equity firms small, large and medium-sized by 1) providing those firms with information 2) protecting those firms’ licenses to operate in a way that’s cost-effective for them and 3) creating a community of best practices where we can learn from each other the best ways to grow companies, to improve governance at companies, to improve companies’ environmental footprints in some cases, to continue to make private equity a very good corporate governance model if your goal is long-term, patient and sustainable economic growth for companies. The team that does all the work is Steve (Judge) and company. My goal is to help them accomplish their mission. But certainly we hope to continue to expand membership.
Edited for clarity