Delegates at the 2017 PEI CFOs and COOs Forum heard former Federal Reserve chairman Alan Greenspan give a keynote speech on whether the Trump administration can roll back the Dodd-Frank Act, and used the opportunity to talk about regulation and tax under the Trump administration; changes in their own roles and how to prepare for a Securities and Exchange Commission examination. Here are eight key takeaways from the forum.
Dodd-Frank repeal would be favorable, but is unlikely
In his keynote speech, Alan Greenspan (pictured) said the Dodd-Frank Act had been a negative for the US economy, but it would be “a remarkable event” if it were repealed because it is such a dense piece of legislation.
The majority – 86 percent – of delegates said they would like to see the act dismantled, but agreed it would be very difficult to achieve.
“[Reforming the regulation] would be hard to do. A filibuster would be possible, but a full rollback is unrealistic,” a panelist said during a discussion on the impact of Donald Trump’s presidency on private equity.
Some chief financial officers participating in the forum’s discussions said there might be small amendments to the act which would be favorable to the asset class, to acknowledge the industry “had nothing to do with the global economic crisis.”
Lighter touch regulation is expected
While they may not agree with his policies, 43 percent of delegates said President Trump will have a positive impact on the private funds industry.
Enforcement actions and examinations are expected to continue, but attendees thought private equity would be under less scrutiny.
“It’s important to keep focusing on what the SEC wants us to do; we’re not going back to 2005,” one chief financial officer said. “But I think the environment will be more favorable for private funds.”
Delegates polled said having Trump’s pick for the agency’s chairman, Jay Clayton (pictured), a former private equity lawyer, would be beneficial for the industry. Around 57 percent said they thought he was well-equipped to head up the regulator.
Millennials move faster
CFOs are concerned about the higher turnover among millennials compared with previous generations, according to an EY survey presented at the Forum.
The consultancy firm said 90 percent expect employees to move on within five years. In an industry that emphasizes aggregate investment team experience, job-hopping by junior talent may be a concern for many firms.
Almost all respondents – 99 percent – said they would aim to keep younger professionals by providing them with growth opportunities. The participants also favored technical skill development and transparent communication for retaining millennial talent.
“The private equity industry is still founder-led and founder-run, with an idea of valuing a long-term employee who knows the carry waterfall for an older fund,” said Carlyle’s Thomas Mayrhofer.
The CFO role, which has already been transformed as a result of regulation and SEC registration, continues to evolve.
Delegates said they are taking on more responsibilities, from dealing with office infrastructure and lease issues, to succession planning and human resources tasks. There was also a consensus that they are expected to feed into the deals process.
“We are starting to analyze the wide range of data we have available to us and use it for other things, besides in-house reporting, perhaps to assist in the deals process,” one CFO said.
Around 40 percent of delegates said they had adopted a more formal procedure for tracking investor data requests, but many added fielding investor questions and preparing the correct reporting documentation is increasingly time-consuming.
“We are now tracking every question and have developed a database of answers,” one attendee told delegates.
The lack of standardization in reporting requirements was a recurring theme, but CFOs at the forum agreed adoption of the Institutional Limited Partner Association’s reporting template was not the solution. One described it as a “huge financial burden” for his small firm.
Tax on carry is not as big a concern as…
Trump’s plan to tax carry as income rather than capital gains hit headlines during the campaign, but conference delegates were dubious it will materialize.
“It isn’t in the House blueprints; maybe it was just happy talk,” was the opinion of one compliance officer, referring to the Republican policy document for the lower house.
Analysts say if the interest is considered ordinary income, many managers could structure it to be taxed at 25 percent, compared with the current 23.8 percent, because of proposals on pass-through income.
Interest deductibility, however, is one area which is expected to change, which would have a big impact on private fund operations.
The House blueprint – the template for the new administration’s reforms – replaces net interest deductibility with an immediate write-off of new equipment in the first year of ownership, freeing up cash to re-invest in the business. While this encourages spending, it is a huge blow to the debt equation for private equity firms.
Fees and expenses policies are being revised
Two-thirds of delegates polled said they had revised their expenses policies since the SEC began publishing details of enforcement action. These have been largely to improve consistency and clarity.
“We made some amendments, which were previewed by investors, and created more consistency in the language [within the documentation] across all funds. If the SEC sees the same thing over and over, they’re likely to stop looking,” a panelist told delegates.
Far fewer delegates polled – 16 percent – said their firm had made changes to the limited partner agreement.
“Many LPAs pre-date regulation and [SEC] registration. They often don’t need changing, some things can simply be clarified. Frequent amendments are really not favorable,” a second panelist added.