Simon, the EC itself has acknowledged that private equity funds do not pose a systemic risk. As such, do you believe that this is a politically motivated move on the part of the EC?
It is not purely politically motivated, but bracketing private equity with hedge funds and attempting to regulate them on a single basis will not produce appropriate and proportionate legislation. All major reviews conducted to examine the causes of the financial crisis, including the Turner Review in the UK and the EU's own DeLarosiere Report, do not identify private equity as a factor in the crisis nor a systemic risk.
Can you quantify for us what additional regulatory compliance and costs are associated with these proposed changes that may affect the private equity industry?
We have estimated that the requirements would cost portfolio companies £15k-40k depending on the size of the company and £50k-£100k for the private equity firm, again depending on size. While the cost is a concern, especially as it will be borne just as the economic recovery is forecast to begin, an equal concern is the public disclosure required by firms and companies. To be forced to publicly disclose strategy purely because you are owned by a private equity firm is anti-competitive and hands a significant advantage to other privately-owned companies which would continue to operate in relative confidentiality.
Approximately 57% of EU-based private equity and hedge funds are domiciled in the UK. Does this mean that this issue has political overtones rather than strictly being a business debate?
There is a danger that this directive could have the effect of driving private equity firms away from London and towards jurisdictions with less proscriptive regulations. We can support better regulation which creates a level playing field for all private companies. We can't support a measure which targets a non-existent risk and disproportionately affects Britain's status as a world-leading financial centre.
Do you agree with the notion that these changes are an over-reaction to recent turmoil in the financial markets?
It is clear that the regulatory framework for the financial system needs to be re-worked and in many ways was not fit for purpose. This regulation is less an over-reaction and more an ill-conceived measure which, if genuinely an attempt to ensure a sustainable financial services sector, fundamentally misreads the causes of the current crisis. Targeting private equity firms will do nothing to ensure greater stability because they were never a cause of instability.
What do you believe the consequences of these changes could be in terms of the loss of private equity firms domiciled in the EU and geographic investment strategies?
Potentially very significant. Placing this burden on funds domiciled in the EU may cause some managers to base themselves in a jurisdiction which allows them to remain on an equal competitive footing.
You have been quoted as saying, "This measure is irrational in that it seeks to bring very different asset management classes such as private equity and hedge funds within the same domain." Will you further elaborate on this point?
Private equity and hedge funds operate in very different ways. Private equity funds are not leveraged at the fund level, unlike hedge funds, and money is usually locked up for ten years and is not redeemable until then - a private equity fund cannot collapse as a result of mass redemptions by investors. Private equity firms hold assets for a long period of time, usually between three and five years, sometimes much longer. They work to create value over this time and generate a return only on exit - rewards are directly linked to long-term performance.
Since these changes do not apply to other forms of private ownership, does that give them a competitive advantage to private equity?
Yes - this is our key concern.
Some feel that during these difficult economic times, the economy needs private equity now more than ever and that to place this additional burden on your industry right now is illogical. Will you comment on this?
I agree with that sentiment. These rules are scheduled to come into force in 2011, just when most forecasts suggests the European economy will begin to grow and move out of recession. It is not just illogical, but potentially negligent to place restrictions on sources of capital which can help Europe recover from the downturn.
Do you have any recommendation as to how leaders in the private equity arena can make their case before the EC in Brussels?
We will be talking with MPs and officials in Britain and explaining the damage this could do and the burden this would place on our national regulator, the FSA, which would have to police this system. We will also be talking with MEPs and European policy makers, making the above points in the hope that we can get the current draft significantly moderated.
Simon, we thank you for your time and insight.