How Congress works for you, private-equity edition
I had a long discussion at lunch today talking about my theory that it’s just as well the Basel III process was ill-publicized and depoliticized. Because when issues get onto Congress’s radar, the quality of debate can be low indeed. Take this debate between two Democrats on the question of whether private-equity funds should register themselves with the SEC:
Rep. Jim Himes, D-Conn., said that private equity funds act a lot like venture capital funds, which are exempt from SEC registration under Dodd-Frank.
“Private equity entities do not employ leverage any more than venture capitalists do,” he said.
Mr. Himes praised private equity funds for staying in falling markets when others are fleeing.
“They are countercyclical investors,” he said.
Despite Mr. Himes’ support, the ranking Democrat on the subcommittee opposes Mr. Hurt’s bill. Rep. Maxine Waters, D-Calif., said that putting private equity under the SEC’s aegis would better protect public pensions in part because it would subject private equity advisers to a fiduciary duty.
Even by Congressional standards, “private equity entities do not employ leverage any more than venture capitalists do” is pretty spectacularly wrong. “Private equity” is, after all, the polite way of saying “leveraged buy-out”, while venture capitalists don’t use debt at all.
As for the idea that PE shops are “countercyclical investors,” wouldn’t that mean that they did more deals when markets plunged during the crisis? As opposed to, say, this?
On the other hand, it’s a rare argument where you end up siding with Maxine Waters, and I’m underwhelmed with her idea that the purpose of the bill is to protect GPs by ensuring that LPs have a fiduciary responsibility.
The main reason for PE shops to be regulated, of course, has very little to do with fiduciary responsibility, and everything to do with the fact that leverage is a systemically-dangerous thing, and regulators need to know where it is and how it’s being put to use. But it can be hard to explain systemic tail risk to the kind of people who only really understand the meaning of a pie chart when they bake an actual pie.
And remember — this is the Democrats, who tend to be slightly — slightly — more sophisticated about such matters than the Republicans. People like Brad Miller and Barney Frank really do know what they’re talking about. But it’s hard for them to compete with armies of lobbyists intent on dumbing everything down to the point of utter nonsense.