European MEPs voted in favour of more disclosure from private equity firms and hedge funds yesterday in a sign that the mistrust of the alternative asset class from some politicians refuses to go away.
The reports that were agreed and voted on, however, were significantly amended by the time of the vote mitigating the number of increased reporting requirements that the private equity industry could have faced.
In short, the amended reports and the attitude of the Commissioner, Charlie McCreevy, mean the likelihood that the current framework in which the industry operates will be substantially changed for the worse is slim.
Following debate and amendments in the European Parliament, the reports were revised becoming principle-based overviews of the financial services sector rather than the party political attacks on private equity and hedge funds they originally were.
The proposals passed by the Parliament are now in the hands of the Commission which in turn decides what, if any, new legislation should be drawn up. The Commission is due to report back to Parliament before the end of the year.
In total 211 amendments were made to the text, which was drawn up by Denmark’s former Prime Minister Poul Nyrup Rasmussen, head of the Party of European Socialists.
The amended reports recognised the difference between private equity and hedge funds, something it had not done before.
It also asserted that all private companies, whether owned by private equity or not, should operate on a level playing field. As part of this the references to limiting leverage on private equity-owned companies which were previously recommended were removed.
There is some risk of additional disclosure being required on certain issues, such as executive pay packages, but broadly speaking there is an expectation that private equity firms will not face much additional regulation.
Essentially, the initial reports reflected the huge misunderstanding about private equity which still dominates the view held by the majority of politicians across Europe.
With the texts rationalised, the implications for private equity look much milder, but this is no cause for complacency.
The European and British private equity trade bodies have taken measures to allay the tidal wave of criticism and suspicion from politicians, trade union leaders and the media which blew up around private equity in early 2007.
Their campaign has involved conveying the beneficial impact of buyouts and venture investment on the economy and demonstrating job creation rather than asset-stripping.
Moreover in the UK, Denmark and Sweden disclosure rules for private equity-owned companies above a certain size have also been introduced.
In his address, the Commissioner noted the steps which the industry had already taken but emphasised that efforts must still be made to self-regulate and prove that it behaves responsibly.
The worst case scenario for the private equity industry now would be to stop further engagement with a broad range of industry stakeholders.
If the reports and the vote in favour of them demonstrate anything, it should be the importance of EVCA and the BVCA continuing to broadcast loudly the positive impact of private equity on the economy.
As we enter a period of stagnating economic growth, it will also be important for individual private equity firms to act in a responsible way to serve their long term interests, rather than cutting losses and abandoning struggling portfolio companies.