- Pro-industry measures draw bipartisan support
- SEC guidance provides firms some relief
- Hopes for a “JOBS Act 2.0” to round up bills
The votes have involved either fairly narrow agreements – such as a budget compromise negotiated by Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) – or fairly obscure issues – such as an increase in the amount of leverage that business development companies can apply to their loan portfolios.
Even so, after three years of political brinksmanship, repeated standoffs over the federal debt ceiling and at least one government shutdown, the recent agreements show that at least some bipartisan compromise is now possible, Washington watchers say.
For example, the Murray-Ryan tax compromise did not include an extension of unemployment benefits that Democrats sought, nor did it make deep enough cuts in federal spending to mollify hardline Republicans. But as Gary A. LaBranche, president and CEO of the Association for Corporate Growth, said, “it beats the alternative of stalemate and the closure of the government.”
The budget agreement is expected to forestall future budget standoffs until at least 2015, but the most encouraging aspect of the deal to buyout boosters is that it attracted a bipartisan majority, passing 332-94, including 32 Democratic votes. That raises optimism that Democrats and Republicans might be able to agree as well on other issues of concern to the industry.
Indeed, another House vote in December attracted a bipartisan majority but also underscored the fragility of interparty compromise. In the vote on H.R. 1105, the bill called the “Small Business Capital Access and Job Preservation Act,” which would repeal a requirement that buyout fund managers register as investment advisers, 36 Democrats joined 218 Republicans to pass the measure on a vote of 254-159. Under the Dodd-Frank financial reform law, buyout fund managers with more than $150 million of assets under management are required to register. While the repeal measure passed, the House rejected, largely on party lines, a Democratic amendment that would have capped the exemption at $1 billion of assets under management.
The measure is unlikely to pass the Senate in its current form, Capitol Hill watchers said. But there is a real possibility that with some tweaks, such as that $1 billion cap for the registration exemption, a modified bill could attract enough Democratic support to pass, said the observers, who asked not to be identified because of partisan sensitivities.
Another measure of interest to the industry cleared a House committee with wide support. That bill, H.R. 1800, the Small Business Credit Availability Act, which would double the amount of leverage that BDCs could apply on their loan portfolios, among other provisions, cleared the House Financial Services Committee in a November vote.
The BDC proposal is one of several largely non-controversial measures that the House is considering. Some observers have said the bill could anchor a “JOBS Act 2.0,” fashioned after the surprise legislative accomplishment of 2012, the Jumpstart Our Business Startups Act, a roundup of proposals that swept through Congress last year.
Why the change?
“It’s not that everybody loves private equity. It’s that everybody loves growth,” said Brett Palmer, president of the Small Business Investors Alliance, a trade group that counts BDCs among its members.
Signs are increasing that regulators as well are making gains in their understanding of the buyouts industry. While the Securities and Exchange Commission did pass a fairly stringent version of the Volcker Rule, which limits commercial banks in sponsoring or investing in buyout funds, the impact of that rule is expected to be largely limited, if only because banks have been spinning out their buyout operations since the Dodd-Frank law passed in 2010.
More encouraging to buyout pros are a pair of technical decisions by the commission. One was guidance from the SEC, announced in August, that rolled back the “custody rule.” Under an earlier version of the rule, a fund manager would be required to hire a third-party custodian to hold stock certificates of its portfolio companies. The revised guidance requires managers simply to be sure that those certificates are secure.
The other rule, the “bad actor” provision, appears to clarify that a buyout shop’s portfolio companies are not considered to be “affiliated issuers” in a private fund offering so long as those companies are not themselves issuers.
The SEC guidance, while technical, signals to the industry that the agency is becoming more sophisticated about the operation of buyout funds. Said Scott E. Gluck, an attorney at the Washington, D.C., law firm Venable LLP: “There is now a recognition that private equity funds are different from hedge funds.”