News

UNI Global Union will continue to advocate to international regulators to include private equity leveraged buyouts in supervision and regulatory frameworks. The 2009 London G20 plan for ‘Recovery and Reform’ reported some favourable outcomes for regulation and supervision of financial markets but failed to mention private equity. Hedge funds however will be specifically targeted.

Private equity firms have been developing arguments against regulation and supervision in anticipation of the G20 statement. An advantageous way of doing this is to distance themselves from their hedge fund cousins. Following is an interesting point of view on the arguments private equity is developing to prove “We’re not a hedge fund”. See the summary below.

There is a longer article which we highly recommend reading which expands on these arguments. The author’s draws out the striking point, deliberately missed from the private equity argument, that “The industry is painting a picture of itself as an island”. Regulators need to be reminded that private equity is no island. Private equity portfolio failure is directly linked to job loss. Pension funds are also directly affected by the performance of private equity. These are not small things to discard from supervision.

Analysts of the crisis rely heavily on making comparison with past financial crisis. Regulators may begin to see a pattern with private equity making a regular appearance in several past economic blow ups. For the private equity industry to claim that they are “merely a participant in the bubble, swept along with everyone else” seems suspicious and regulators must realise the significance. Unions around the globe must get this message across the national and international regulators. The full article can be found at : https://www.fis.dowjones.com/WebBlogs.aspx?aid=DJFPEA0020090331e54100008&ProductIDFromApplication=&r=wsjblog&s=djfpea

We’re Not A Hedge Fund

From The Wall Street Journal.com and written by By Laura Kreutzer and Shasha Dai.

April 16, 2009,

http://blogs.wsj.com/privateequity/2009/04/16/were-not-a-hedge-fund/

As regulators gear up to monitor private pools of capital more, private equity firms have a message they really, really want to get across: we’re not hedge funds.

PE firms hope that they can educate regulators about the many, many ways in which they differ from hedge funds, and thus escape regulation - or at least be regulated differently.

Their arguments go like this:

*We’re patient capital, not susceptible to short-term swings. Private equity funds lock their investors’ capital up for 10 years or more. Unlike hedge funds, they can’t be wiped out by spiralling redemption requests.

*We invest in companies, not obscure financial instruments, and that makes us more resilient. “Private equity funds invest in bricks, mortar and people, not complex securities,” Robert Stewart, spokesman for the Private Equity Council, wrote in an email. “They are not subject to ‘runs on the bank’ by their investors.”

*We use less leverage than hedge funds. Because private equity firms invest in companies, they’re typically pretty careful about how much debt they put on the company, since getting that wrong almost certainly means bankruptcy for the company. Even during the recent boom years, PE firms’ use of leverage has remained well south of the 30-to-one or 40-to-one levels frequently seen at investment banks or hedge funds.

*We use leverage differently than hedge funds. Private equity firms for the most part use leverage at the portfolio company level, not at the fund level. That means that if a company collapses, the trauma is limited just to it. “If private company X fails tomorrow, it doesn’t have an impact on private company Y,” said David Marchick, managing director for global government and regulatory affairs at Carlyle Group. “On the other hand, if we were a hedge fund and invested in public companies X and Y and we experienced redemptions, it might force us to quickly pull out of one or both of the companies and liquidate other investments. This type of forced selling could accelerate a downturn in the market.”

But while these arguments hold true for the vast majority of private equity firms, they don’t necessarily provide an accurate picture of what the largest buyout firms look like today. Some large buyout firms do use debt at the fund or management company level, and did run into margin calls and other hedge fund-type problems in the recent downturn. And that, undoubtedly, is going to make it harder for the industry as a whole to make its case.

End