ICV generates 6x return on sale of Outpatient Imaging Affiliates, Private equity gets skewered in Warren-led Senate hearing

Private equity may be set for big changes as a result of a congressional bill.

Happy Thursday!

Let’s take some time today and get into some politics. The way things are looking, the private equity industry will be facing some sort of big changes, whether around taxes, or stricter disclosure requirements.

Then again, Democrats don’t seem able to unify behind any sort of messaging, so it’s possible that, as usual, the industry will take a rhetorical beating without sustaining too much physical damage.

Sen. Elizabeth Warren led a hearing of the Senate Committee on Banking, Housing and Urban Development Wednesday about private equity. She used the hearing to re-introduce her sweeping private equity regulatory bill called the “Stop Wall Street Looting Act.”

Sen. Warren first introduced the bill in 2019, but it never got much attention from Congress. The bill, as originally written, would have fundamentally changed the way private equity operates – from hindering GPs’ ability to deduct the cost of interest payments from portfolio companies’ tax bills to barring a portfolio company from issuing any dividends for the first 24 months after a buyout.

Warren said the hearing Wednesday was the first in the Senate focused exclusively on private equity. The hearing featured two speakers defending the private equity industry, who claimed Warren’s bill would cost millions of jobs. It also featured a former employee of Art Van Furniture, formerly backed by Thomas H. Lee Partners, which went bankrupt earlier this year, and a current nurse with Leonard Green-backed Prospect Medical Holdings. Watch the hearing here.

Fees: Perhaps the speaker that most caught my attention was Illinois State Treasurer Michael Frerichs, who said private equity has done very well for the Illinois pension system. Frerichs’ message was that private equity needs stricter disclosure requirements to make sure institutional investors get the information they need to make decisions about their portfolios.

“In my own experience, the lack of transparency surrounding private equity investments, specifically related to fee arrangements and the calculation of the internal rate of return creates significant challenges for institutional investors like my office and our state retirement plans,” Frerichs said in prepared testimony.

Here’s where the cost transparency discussion gets into that weird, nuanced area that is tough to understand unless you’re directly involved.

Sen. John Kennedy, R-LA, pushed Frerichs to explain whether he’s ever invested in a fund without understanding the fees. After a back and forth, Frerichs said no, he’s never invested in a fund without understanding the fees.

But that’s not exactly what Frerichs and others mean when they advocate for stricter disclosure requirements. The need for better and more consistent information goes well beyond the initial headline fees agreed to in the LPA. It has more to do with the gray area of fund expenses, and the changing calculations that impact performance fees.

“Private equity firms use different terms, different methodologies around calculating asset values, and different metrics to report on their performance, with some breaking out fees and expenses to investors while others make fee and expense information much harder to identify. This makes evaluation cumbersome and makes direct comparisons between funds nearly impossible.” More on this later today.

Imaging: ICV Partners generated a 6x return on its sale of Outpatient Imaging Affiliates to Cranemere Group in a deal valued at about $400 million, writes Sarah Pringle on PE Hub today.

The deal concludes a sale process run by Coker Capital, Sarah writes. Cranemere, formed in 2012 by Vincent Mai as a holding company, has prior healthcare experience including with Northstar Anesthesia, a national anesthesia provider it bought from TPG Growth in 2018.

Mai moved into the CEO role at Cranemere in December 2020 after Jeff Zients resigned to join the Biden administration. Read more here on PE Hub.

That’s it for me! Have a great rest of your day. Reach me with tips n’ gossip, feedback or The Drama at cwitkowsky@buyoutsinsider.com or find me on LinkedIn.