A recent amendment to pending legislation that would regulate private firms has the buyout and venture arms of the private equity industry at odds with each other.
That was clear at a hearing by the House Committee on Financial Services Tuesday, as representatives of the buyout, venture, and hedge fund industries passed judgment on a recently issued revised version of the legislation, released by Congressman Paul Kanjorski (D-Pa.).
The bill originally would have regulated all sorts of private funds by requiring them to register with the Securities and Exchange Commission, but the revision exempts venture firms. Doug Lowenstein, president of the Private Equity Council and James Chanos, chairman of the Coalition of Private Investment Companies, both said the exemption could be a mistake as written. The Private Equity Council, which represents only the largest buyout firms, has previously supported the registration requirement.
“I think it will prove very difficult to define a venture capital approach,” said Lowenstein, who instead proposed that Congress simply raise the threshold of assets under management required for SEC registration from the $30 million minimum currently set by the bill.
Lowenstein added that small private equity firms would suffer just as much under the proposed legislation as venture firms would. “That’s why the touchstone…[shouldn’t be] what you say you are. It’s the size of what you do and whether you create systemic risk,” he said.
Chanos, who is also founder of New York-based hedge fund Kynikos Associates, also questioned the merits of exempting a specific class of firms solely on the basis of a “self proclaimed investment thesis.”
“It’s an invitation to the growth of bubbles and fraud,” Chanos said.
Terry McGuire, chairman of the National Venture Capital Association, which lobbied vigorously for a venture exemption, defended the revision. He said that coming up with a definition for a venture firm would be relatively easy by using the U.S. Treasury’s suggestions for defining systemic risk by assessing use of leverage, trading risk and counterparty risk.
McGuire also appeared to take aim at the Private Equity Council’s broad support of SEC registration. “We have never taken a position that registration would work for our industry,” he said.
View the prepared testimony of all the participants at the hearing here.
(from blogs.wsj.com, October 6, 2009)