Last month, the private equity lobby supported the government’s requirement that buyout firms register with the SEC, even while arguing that “private equity firms do not create systemic risk.” Today, however, the PEC came out against proposed FDIC guidelines for buyout firm investments in banks, saying that they go to far and would be counterproductive.
“We hope that the comment period yields changes that facilitate the flow of private capital into the banking system, consistent with the Administration’s other efforts to address the financial crisis,” said PEC president Doug Lowenstein.
To recap, the proposed rules include a minimum three-year hold time, capitalization requirements, cross-guarantees for firms with multiple banks in its portfolios, and extensive disclosures, particularly regarding ownership structures.
To be clear, there is no surprise in these guidelines. We had a pretty decent idea that Sheila Bair was going for these exact guidelines a few weeks ago. My hunch is that private equity firms are going to push more on certain of the rules than others.
The ones that should probably be scaled back are the cross-guarantees between portfolio companies-something a buyout pro does not currently do with portfolio companies; this isolation of funds and investments could be what’s keeping some funds in the black.
But the biggest bone of contention will like to be with the capitalization requirements, which, at leverage ratio of 15 percent and capital of at least 6 percent of risk-weighted assets, is stricter than what most buyout firms would be willing to adhere to and stricter than what is required of other investors in banks (for example, wealthy individuals or publicly traded entities).
As for the others: A buyout firm cannot rationally argue that a bank under its ownership should be able to lend to it. Why even risk the appearance of impropriety when the “leverage” part of leveraged buyouts is under so much scrutiny already? A bank giving its owner favorable terms on debt would only serve to fuel that fire. I doubt the PEC and buyout firms will argue against this one. Besides, I believe Blackstone, Carlyle, et al agreed in their recent purchase of BankUnited that the bank subsidiary would to its parent firm.
The same goes for disclosures. The move toward greater transparency for buyout firms shouldn’t stop with Blackstone, Carlyle and KKR making their annual reports public. There’s no problem in the government knowing who owns what piece of which bank..
The PEC declined to comment further on its statement.