US law ups risk for energy portfolio companies

President Obama’s recent signing of the Comprehensive Iran Sanctions Act is likely to make it more difficult to invest in energy and financial sector businesses. Under the act, which primarily targets non-US financial institutions, private equity funds holding a portfolio company with significant ties to Iran’s energy or financial sector, risk exclusion from US markets and investors.

The act requires President Obama to impose sanctions against private equity firms he determines “knowingly” assisted Iran’s production of petroleum under certain conditions.

“Historically, the president has never enforced his authority to sanction non-US firms, the act strips some discretion, meaning the president is now required to investigate any report of a company potentially dealing in sanctioned activity,” said Thomas Bogle, a partner with law firm Dechert, in an interview with PEM.

The act will make private  equity investment in Iran  more difficult.

US-based private equity houses also encounter greater risk with respect to passive investments in foreign energy companies. While previous legislation restricted US financial institutions from directly investing into Iran, passive holdings in foreign portfolio companies with business in Iran previously went unpunished.

“Say a private equity fund owned a French energy company selling petroleum products to Iran: nothing illegal about that. What could happen now, if somebody were to file a report, the president would be required to investigate and make a determination as to whether or not the company and fund are providing support to Iran in violation of the act.

I’d certainly recommend private equity firms to conduct a thorough due diligence for any portfolio companies dealing in finance or energy with Iran,” added Bogle.