The SEC is considering new regulations aimed at private equity hoping to increase transparency and fairness for investors, and the American Investment Council will be ramping up its education efforts in hopes of helping form regulations that are appropriate for the private equity industry.
Private Funds CFO recently chatted with the new chair of the AIC, Pam Hendrickson, about the group’s areas of focus for the coming year, its strategy for dealing with likely new regulations and where the group would like to see more growth.
Why did you first get involved with the AIC?
My initial involvement with the organization, which was called the Private Equity Growth Capital Council, was looking for a way to explain to Congress how private equity helps small businesses. This has been an ongoing effort for AIC and that’s why I initially got involved. There’s a tendency to define private equity by a few big firms, but the reality is that there are 5,000 firms and 80 percent of the $1 trillion that was invested in private equity last year went to small businesses. And that’s something I think people really need to understand.
There are four stories, in particular, that really highlight what private equity is and what it has done for small businesses: Riverside’s own Red Nucleus, Kinzie Capital’s Chelsea Lighting, Clearhaven’s EngageWare and Avance Investment Management’s Wholesale Supply Plus. These four companies combined employ 775 people. That’s a decent amount of jobs.
The other thing that is really interesting about all of these businesses is that women were all involved in the investment processes.
Since joining the AIC, what are some of the biggest changes you’ve seen in the industry. Are there areas that you think still need improvement?
I think there is tremendous positivity. First, membership has grown by 40 percent, and the more members we have and the more stories we can tell, the more it helps us with education. Frankly, the more firms that belong, the more risks we can identify and manage, which is a lot of what AIC’s job is. I would like to encourage more firms to join.
I think with diversity and inclusion, this industry is changing. While there has been a lot of press about the lack of progress, I’m actually impressed with the progress. You have more firms being started by women now, and that is really exciting. There are many more programs now to encourage more diversity in PE. We need to keep working on this, but firms are totally committed to this effort, and I’m excited about the changes we’ve seen.
What are your goals as chair of the AIC?
My goal as chair is to really spend time helping everybody understand what this business really is. I would like to continue the efforts that have been made to educate policymakers on the importance of private equity, in terms of job growth, in terms of helping small businesses and communities, and in driving returns.
We as an industry have not done a great job in educating people about what private equity does and we need to continue educating people. And this extends to legislation and making sure that what is drafted is what was intended. There’s a lot of turnover in Washington and you may have educated certain people five years ago, but none of those people are there now. So, you have to constantly work to educate people and make sure they understand the industry before taking action that may have unintended consequences.
Does the AIC have any specific plans for growth?
We don’t have specific plans. But we do want to make sure all types of funds are represented. For example, private credit is one area where, if we had more members engaged, then we would know more and be able to educate others better. That’s a place where I think, from a regulatory standpoint, we will want to watch, so we want to make sure we have more members in this area engaged so we can best represent them.
What do you see as the biggest challenge facing the industry?
I think the biggest challenge is just continuing to educate. It’s not just about turnover in Washington, but about working with people who aren’t in this industry every day. You have to make sure they understand the jargon and that you’re speaking the same language so everyone is on the same page.
What issues will you and the AIC be focusing on?
I think 2022 will be a lot about regulation, so we will be keeping an eye on that and making sure the regulations make sense for the industry.
ESG is enormously complicated. We all know it is imperative that we do more, but what is the right thing to measure? I think the how, why and what you’re going to measure are going to be great areas of focus and discussion. For example, if you look at an environmentally friendly company, maybe further down the line in production they have some questionable practices; how do you measure their ESG practices? This is a complex consideration, and one we will be dealing with.
What is the AIC’s strategy for dealing with anticipated regulations?
The transparency question is one that comes up a lot, and I think it’s really a question of understanding. From our end, when you talk about transparency, we want to know what it is that regulators want so we as an industry can figure out how to provide that. I don’t think there’s anyone in the industry that doesn’t want to provide information, but we want to make sure the information is relevant and that it can be provided in a way that makes sense for everyone.
So, again, it comes down to understanding and education. You want to know what is being proposed and what’s its impact will be and if there will be any unintended consequences, so we can make sure that the ultimate regulation is really what was intended and makes sense for the industry.