With Mitt Romney’s failed candidacy for president in the past, the private equity industry looked forward to a quieter 2013, at least as far as headlines were concerned. But that didn’t really happen. The industry couldn’t keep itself out of the news, thanks to a number of legal, regulatory and legislative headaches that bubbled up in 2013—collusion, SEC registration, carried interest, the Volcker Rule and even a case involving Mexican drug cartels. Private equity can’t catch a break these days. But, as luck (and some lobbying) would have it, the industry didn’t have a terrible year. The Volcker Rule, arguably, was a net positive for PE firms, carried interest wasn’t addressed in the December budget, and H.R. 1105, which would exempt PE firms from registering with the SEC, was passed in the House. Combined with a “biblical” year for exits, all in all it was a good year for the industry.
With economic populism flowing after Romney’s campaign, particularly its focus on the PE industry, it would have been hard to predict earlier this year that carried interest would have survived the next budget. But it appears that it has. The budget signed by President Barack Obama last week didn’t target carried interest, despite expectations from some top PE execs (including Carlyle’s David Rubenstein) that the lower tax rate would be increased. Turns out, though, that private equity is a significant source of campaign money for both parties, which makes targeting the industry’s tax break a sticky issue, despite carried interest’s low popularity among the public.
The Volcker Rule
Another win for private equity. The Volcker Rule prohibits big banks from owning more than 3% of a private equity or hedge fund (or investing more than 3% of its own capital in PE or hedge funds). The new rules have led to a divesting bonanza for banks, which have been selling their PE divisions to secondary investors left and right ahead of the finalized ruling. Ardian, Lexington and HarbourVest are just a few that have padded their assets thanks to the Volcker Rule. Going forward, though, bread and butter buyout firms may be the biggest beneficiaries of the new law, thanks to less competition from the likes of JP Morgan, Credit Suisse and Morgan Stanley, to name a few that are getting out of the business.
SEC Registration — H.R. 1105
“The Small Business Capital Access and Job Preservation Act,” which would exempt most (and possibly all) private equity firms from registering with the SEC, was passed by the House in early December. It still needs to pass the Senate. As written, the legislation would exempt PE firms from registering with the SEC if their funds aren’t levered more than two times the fund’s committed capital level. How that will square with Dodd-Frank provisions is an open question. One nugget in the Dodd-Frank bill requires firm’s with more than $150 million of AUM to register with the SEC. Some firm types, including venture capital and family offices, are already exempt from that rule, but PE is still on the hook.
The Collusion Case
In a lawsuit that originally began in 2007, a group of shareholders at public companies acquired by PE investors sued the firms, which included a number of recognizable players in the industry. The plaintiffs accused the firms of conspiring to not outbid each other on a number of different deals, which would have made the take-private buyouts cheaper for the buyers. Among the firms involved, two (Apollo Global Management and Providence Equity Partners) were dismissed from the case this past July. Several other prominent firms remain involved in the lawsuit, including KKR, Blackstone, Silver Lake, TPG, Bain, Carlyle and Thomas H. Lee Partners. The New York Post surmised this week that the lawsuit will command more than $1 billion to be settled, though the firms are reportedly not ready to quit fighting.