NEW YORK (Reuters) – Proposed rules in Europe to increase regulation on private equity are worrying U.S. buyout firms, and the worst case scenario could be a serious threat to fund-raising by U.S. firms there, the head of the buyout firms’ industry group said on Wednesday.
“There’s no question that the regulatory environment in Europe is less friendly than it is in the U.S.,” said Doug Lowenstein, founding president of the Washington-based Private Equity Council.
“I don’t mean it’s warm and fuzzy here,” said Lowenstein, speaking at the Reuters Private Equity and Hedge Funds Summit in New York. “But on a relative basis, there is still a strong political faction that wants to regulate private equity, and you see that in the ‘directive’, which is much more heavy-handed than anything being contemplated here.”
The Alternative Investment Fund Managers Directive proposes regulation that demands greater disclosure about investments and could hamper the ability of non-EU firms to raise funds in Europe.
Some in the private equity industry have claimed there was progress in having their views heard under the Swedish presidency of the EU, but say further changes have been a step back since the beginning of January and the start of the Spanish presidency.
Buyout firms in the U.S. are “all acutely aware of it” and concerned, said Lowenstein, who is among many who is worried about the issue.
The PEC has as its members buyout firms such as Apollo Management APOLO.UL, Bain Capital, Blackstone Group (BX.N), Carlyle, Kohlberg Kravis Roberts & Co (KKR.AS) and TPG Capital
“The potential under the worst case scenario, which is the form of the directive right now … is a pretty serious threat to all domestic private equity firms, and certainly the larger firms that have been actively fund-raising over the last decade in Europe,” he said.
The directive remains a work in progress, Lowenstein said, adding that the industry would know more in a few months.
“It puts a lot of restrictions on your ability to raise capital in Europe if you’re not a Europe-domiciled business; which is sort of restrictive to trade,” said Garrett Moran, chief operating officer of buyout giant Blackstone’s private equity unit, at the summit on Tuesday.
U.S. REGISTRATION, TAX
In the U.S., debate remains over requiring private equity firms to register as investment advisors with the Securities and Exchange Commission. The PEC said last year it supported such proposals.
“We felt that it was a reasonable way for regulators to have a window into private equity, which clearly they are entitled to have,” he said.
However, Lowenstein is concerned about proposed hikes to carried interest tax. The U.S. government plans to raise the tax paid on “carried interest” — a major source of earnings for private equity executives — although it is unclear it will become law any time soon.
Lowenstein said while he doesn’t expect a change in the carried interest tax to be enacted this year, there is a risk.
“There continues to be a real risk and potential for the proposal to be enacted in some form this year,” he said.
While private equity would continue to invest if a tax hike occurs, some deals will simply be less attractive to do on a returns basis, he said.
By Megan Davies