Regulators and private equity's image problem

Regulators in the US and EU are under a lot of pressure to hold financial companies accountable for the 2008 economic crisis. The private equity industry, which has traditionally been opaque and poorly understood by the public, has increasingly found itself at the receiving end of new regulations that many in the industry believe excessive and directly tied to its negative public image.

That was a hot topic at PEI’s annual Investor Relations & Communication Forum in New York last week. Speakers and attendees voiced the need for private equity players to communicate the positive role private equity plays in rebuilding the global economy to help stem the tide of overzealous regulations.

“I think we’re going to see regulators focus more on this sector,” said Joel Kurtzman, a senior fellow at the Milken Institute, and the former editor of the Harvard Business Review, in his keynote address at the conference last week. “They don't understand the ownership structure, they don't understand returns.”

One conference attendee felt the public perception of the industry was “getting worse and worse”. “We’re seen as selfish fat-cats. We tear apart companies and fire workers. That’s what the media portrays and people believe. But, we rebuild these companies and hire employees.”

The latter point is one that managers need to consistently stress with hard data points and examples. For instance, private equity in Europe and the US has surpassed traditional companies in terms of job creation. While there may be initial job losses at a company after it is purchased by a private equity firm, that tends to be followed by an increase in hiring down the line, Kurtzman told the audience.

Better telling its own story and explaining its business model won’t, of course, halt incoming measures like the EU’s AIFM directive or registration and compliance requirements for the US’ Securities and Exchange Commission. But all industry participants working to ensure the public and policymakers are well aware of the private equity industry’s positive impact on the global economy could help reduce the chances of additional, onerous regulation down the line.