The private equity industry in developed markets has done a poor job of touting the positive effects the asset class has on society, and as a consequence is facing a barrage of potential new regulations.
These consequences have lessons for emerging markets, according to panellists at the 12th annual Global Private Equity Conference in Washington DC on Wednesday. Fledgling private equity industries in emerging markets need to get out ahead of negative perceptions and in selling its story to the public and regulators, the panelists said.
A swath of regulations in Europe and the UK, including a rule barring firms from countries with regulatory systems that don't meet certain standards, stem from a misunderstanding of what the industry does, according to Simon Walker
, chief executive officer of the British Venture Capital Association.
Walker was referring to the proposed European Union Alternative Investment Fund Manager directive, which seeks to further regulate private equity and other fund managers.
“We don't have a widespread understanding of what the industry does,” Walker, a member of a panel discussion regulations, said. “A lot of the problems in the UK and Europe have come from an ignorance of what private equity actually does.”
“We have a real problem on our hands, a lot of it from not having explained a lot earlier what the industry actually does and taking some focus off funds and on the benefits we bring to investors and the companies we actually invest in,” Walker said.
Walker continued that his “guess” was the effort to bar private equity firms from working in Europe based on their home country “will be significantly watered down. Thanks to [US Treasury Secretary] Tim Geithner, and pressure from other countries, the third-country regime will be made a bit more accommodating”, Simon said.
Doug Lowenstein, founding president of US lobbying group the Private Equity Council, said the drive to regulate the industry in the US was due in part to misunderstanding of private equity's role in the capital markets, but in the US, it was mostly about the need for tax revenues.
“People in the US do understand private equity is not a cause of systemic risk. Virtually every bill [being considered in the US] doesn't attempt to regulate private equity in a very intrusive way,” Lowenstein said. “I don't think this is animated by a desire to control, shut down or punish private equity. [The US government needs] to raise money.”
The panel discussed two efforts in the US on regulation – an effort in the US Congress to force firms to register with the Securities and Exchange Commission, and a move to treat carried interest as ordinary income, rather than capital gains, which would increase the tax rate on carry.
The battle over increased taxes on carry was ongoing, and the “issue is very much alive”, Lowenstein said, adding it's more than a sure bet that “the outcome would be unfavourable to the industry”.
In South Africa, the private equity industry has tried to get its story out early, before any kind of negative perception can be built up, said Andre Roux, chief executive officer and founding partner of Ethos Private Equity.
“You have to make an early start in an advocacy programme so the industry can be better understood and its contribution to society,” Roux said.
The negative story about private equity is easier to tell, and is a more attractive story to the media, Lowenstein said. “You need to define yourself before others, particularly your critics, define you,” he said.