- Intense focus on cybersecurity
- Firm concerned about potential elimination of interest expense deduction
- Expects PE regulatory load to ease
1: How concerned are you about a potential elimination or reduction of the interest expense deduction?
We first raised this as part of the [GOP tax blueprint (published in mid-2016)]. We made the point that with the lower rate and immediate expensing, it could be net favorable. But we also said at the time we had serious concerns about any unexpected consequences of moving to a dramatically different approach to tax without interest deductibility.
Since then, our serious concerns about the uncharted territory of going to a regime without interest expense deductibility has grown. From when we were looking at this in January … it has only become that much more unpredictable.
2: How has the regulatory environment changed for private equity under the administration of President Donald Trump?
You have new leadership with the SEC chair (Jay Clayton). He’s not ideological. He’s very pragmatic, very focused on the integrity of the markets. There’s a real focus on the cost of compliance and the impact on capital formation. He’s noted the negative trend on IPOs. For private equity specifically, Peter Driscoll, acting chief of the SEC’s Office of Compliance Inspections and Examinations, indicated that private equity will probably not be as much of a focus as it has been.
There’s a reasonable expectation of many commentators that there may be more of a focus on dealing, as was historically the case, with deficiency letters and disclosure rather than a referral to enforcement.
For us, it really won’t change the way in which we meet LP expectations. That bar has been raised, and that’s going to be met in any event.
3: What have firms done to improve transparency for their LPs?
While transparency has been an area that has received a lot of attention, the issue has to be put into context. Any claims of a lack of transparency is belied to a degree by independent surveys. Look at Preqin surveys — it’s in the single-digits among respondents who perceive private equity in a negative light. Preqin ranks investor views on key issues facing private equity and on the most recent survey of about nine issues, transparency is last.
We get most of our LPs re-upping and you just can’t do that if there is an issue of transparency. The industry has worked with the Institutional Limited Partners Association on new reporting templates. There is constant movement toward meeting LP expectations of more and more transparency.
4: What effect has the move toward reporting standardization had on the industry?
With any new process or new template there’s a transition period, both with the industry adapting to it and the investors liking the consistency. But at the same point, investors also like a little bit of tailoring to their own needs. So working it all out is going to be a process. But there is a uniform desire that it moves in this direction.
5: How important has cybersecurity become to the organization?
We would be reckless for cybersecurity not to be a focus. We’re investing tremendous resources, so how do we do it? How do we focus on this area? It starts with risk assessment, evaluating the risk, making sure controls are well tailored, looking at access rights. How do you authenticate? How do you get on the system? We’re also looking at internal threats in terms of data loss, external threats, your controls in terms of patch management, vendor management and a lot of training.
All our employees are part of cybersecurity. It’s not a matter of: How do we respond when there is an incident? It’s a comprehensive approach to put us in the best position possible.
We have an extensive internal team. They are continually reporting to senior management, they are continually reporting to our audit committee and our board. They’re interacting with employees and with leadership of every business unit. It’s a very intense, dedicated response to the threat.
This article has been edited for clarity