4 minute read 24 May 2018
Committee hearing, woman speaking

How PE firms can prepare for reduced regulation and rising anti-globalism

By

Jeffrey Hecht

EY Global Private Equity Tax Leader

Passionate leader in private equity. Proactive advisor to clients. Husband. Father. Accomplished triathlete.

4 minute read 24 May 2018

As Washington makes noise about regulatory easing, what can PE firms expect?

Private equity (PE) faces a complicated political and regulatory landscape – defined by the tension between two key trends: the prospect of coming deregulation, and the rise of anti-globalist sentiment across the developed world. Our latest report on the future state of PE, How can private equity transform into positive equity?, addresses these topics with insights from some of the most established executives in PE today.

Trend 1: The drive to more liberal US financial regulation

In the Trump administration to date, several major shifts in US attitudes towards PE regulation have begun to emerge:

  • Dodd-Frank reform: The Dodd-Frank Act, the monumental piece of legislation passed by Congress in 2010 as a response to the 2008 financial crisis, requires PE firms to register with the US Securities and Exchange Commission (SEC), and disclose information on a wide range of behavior. President Trump has suggested that central pieces of the Dodd-Frank Act and accompanying regulations could be subject to review and modification.
  • Opening up of investor involvement: SEC law currently prohibits retail investors from investing in PE. Currently it is only open to “accredited investors” – those with an income of more than $200,000 and a net worth of more than $1 million. However, in 2017, the House passed legislation widening the definition of accredited investors to include those licensed as brokers or investments advisors by the SEC, with the appropriate knowledge of an investment area. The Senate has yet to act on a similar measure. SEC Commissioner Piwowar has also publicly supported broadening access to private markets by revisiting the accredited investor definition. It’s likely this issue will continue to be examined in the coming years.
  • Review of the Fiduciary Rule: President Trump has also ordered a review of the Department of Labor’s sweeping Fiduciary Rule, which has been seen by some as potentially curtailing the ability of many different classes of investors – including PE firms – to operate effectively, or at all.

Among the champions of reform is Stephen Schwarzman, CEO of Blackstone. In our latest PE report, Schwarzman states “There is going to be a major regulatory reset with the Trump Administration, a rollback of rules restricting the extension of credit that have consequently lowered overall growth rates in the country.”

However, regulatory reform is far from guaranteed. The Trump administration has so far struggled in executing its legislative agenda, and regulatory reform may be no easier – particularly as many of these rules enjoy broad popular support.

This support for existing rules extends to the financial sector – investors are naturally concerned about how their money will be used, and even Schwarzman is supportive of some disclosure rules, describing them as “good and healthy.” In our PE report, Chip Kaye, Co-CEO of PE firm Warburg Pincus, downplays the significance of regulatory burden, particularly for larger firms: “People like to complain about filing forms and paperwork, but in the aggregate it’s all reasonably manageable.”

There is even ambivalence within President Trump’s cabinet. Treasury Secretary Steven Mnuchin supports parts of the Volcker Rule that prohibit investment banks getting involved in the activities of PE firms, as well as a return to parts of the Glass-Steagall Act, which bar commercial banks from investment banking activities.

Trend 2: A global backlash to globalization

Even if a deregulatory agenda is pursued by Congress and the Trump administration, it might be tempered by the anti-globalist backlash gripping many major world economies – including the US, where President Trump’s “America First” rhetoric has tapped into this popular distrust of internationalist attitudes.

Nationalist, populist politics may limit cross-border activity. “Global headwinds will be more complicated than in the recent past,” says Nouriel Roubini, Professor of Economic and International Business at New York University Stern School of Business, in our report. Protectionist barriers could make it more difficult for leading PE firms to recruit internationally. This could be particularly damaging in an age where fresh, tech-savvy talent is more in-demand than ever before.

From its earliest days, PE has looked across borders for investment opportunities, and this isn’t likely to stop. “The Pritzker and Rockefeller families have been investing overseas since the 1970s. Many PE firms have been global for a long time,” commented Mel Klein, Founder of GKH Partners, in our report. This is a persistent trend – according to Kaye, half of Warburg Pincus’ investments are outside the US, and 40% are in Asia.

The attractiveness of overseas investment will only increase as more and more opportunities present themselves in fast-growth markets in China, Southeast Asia and Africa. And if the nationalist trends across the developed west continue to gain momentum, and subsequently result in declining growth, then developing economies may seem more attractive still.

“The increased nationalism we are seeing around the world is a continued threat to the global economy and its growth potential,” says Mark A. Weinberger, Global Chairman and CEO, EY. “Globalization is an opportunity, but it has to be managed with an eye towards inclusive growth. PE needs to be part of the solutions that address the downside and tensions globalization brings.”

What other headwinds are on the horizon? For more insights on how PE is addressing external market forces, read the full report or find further information here:

Summary

Deregulation in the US and anti-globalization present both challenges and opportunities for PE firms.

About this article

By

Jeffrey Hecht

EY Global Private Equity Tax Leader

Passionate leader in private equity. Proactive advisor to clients. Husband. Father. Accomplished triathlete.