European Private Equity Nears Moment of Regulatory Truth

Europe’s private equity industry faces a nervous few days. On Wednesday, the industry will make a final submission to the European Commission before a high-level conference in Brussels on Thursday and Friday.

The event, officially the European Commission Conference on Private Equity and Hedge Funds, should give buyout firms a much clearer view on whether they will be burdened by Europe-wide regulation.

Internal Market Commissioner Charlie McCreevy is under pressure from the European Parliament, particularly the Party of European Socialists (PES) to regulate leveraged buyouts.

The Commission must report back to the Parliament in mid-March recommending any new legislation.

In December, McCreevy launched a consultation process to explore potentially regulating hedge funds. He announced the consultation would look for evidence for regulating hedge funds, but excluded private equity from the process.

Private equity has some cause to be optimistic based on the distinction McCreevy has already made between the two asset classes.

Moreover, his long-term stance has been one of asserting that he does not believe private equity poses a systemic risk to the financial system.

But McCreevy’s apparent laissez-faire stance on private equity has provoked opposition from PES who have written to the President of the European Commission, José Manuel Barroso. Barroso replied in an open letter that something will be done.

“New regulation will be required…that is a clear commitment on our part. It means that hedge funds and private equity must be covered,” he wrote just before Christmas.

It seems the European industry body EVCA is leaning towards presenting a code of conduct at the final submission tomorrow. Last week, EVCA’s secretary general Javier Echarri told the Financial Times that it would agree to combine elements of existing guidelines into a pan-European code for private equity.

“It is complicated, with all the differences between the different countries and standards we have in Europe, but our aim is to pool all that together,” he told the newspaper.

The UK industry body, the BVCA, may be less keen to agree to this having proactively introduced and championed the path of self-regulation for the buyout industry through the Walker guidelines.

Poul Nyrup Rasmussen, former Danish Prime Minister and now President of the PES, told Merger News self-regulation was insufficient.

“The moment for self-regulation has passed for several reasons. The greed of the financial sector, and the collapse of the financial market, has stripped the industry of the necessary credibility to self-regulate,” he said in an exclusive interview.

“The matters to be regulated should include limits on leverage, minimum capital levels for LBO target companies, registration and authorization of management companies and fund managers, rules on conflicts of interest between private equity partners and the management of target companies,” he argued, adding that an amendment of existing Directive 77/91/EEC could be undertaken to this end.

Presenting its own version of regulation at tomorrow’s submission may be one way the industry seeks to control the extent of the regulation it will face.

It may be in the long term interests of the industry to take this path as the pressure for such regulation mounts and the growing number of high-profile leveraged deals blowing up suggests to policymakers that the industry is a cause of instability.

Many buyout firms have spent the last eighteen months working with industry bodies to demonstrate they are responsible investors. Additional regulation would be a real blow to these efforts, particularly at a time of near-crisis on other fronts.