Reviewing the 1951 Broadway debut of the play “I Am A Camera” Walter Kerr’s headline was “Me No Leica.” His comments mirror my own with respect to the Private Equity sections of the recently passed Dodd-Frank Wall Street Reform Act. Under the guise of attempting to control “systemic risk” Congress has become the Asian Carp of leadership, leaping to react to any stimulation, causing harm with each action without first actually considering the cost or benefit of the action. Simply summarized, the new law requires any private manager with more than $150 MM in assets under management to add compliance personnel to register with the SEC and to spend a small fortune on documentation of such despite these managers already being subject to various laws governing unregistered securities. Not yet clear is whether or not Elin Nordegren, (Mrs. Tiger Woods), with her alleged $750 MM in assets, is feared to be a systemic risk and subject to registration.
Quite willing to give the Dodd-Frank supporters a chance to explain their thoughts we addressed the following questions to their spokesperson and received the noted responses.
Olympus query: Can you point to an example of systemic risk in Private Equity that contributed to the recent economic collapse?
Olympus query: Do you realize substantial Federal Law already regulates PE, its investors and their market activities?
Olympus query: In light of recent disclosures that several Congressmen have been trading stock based on information they received about industries they help regulate, does this new law not seem like a potential conduit for more questionable security activity by government employees?
Fully satisfied that deep thought had been given to the legislation, our reporter moved to another assignment.
Markets continue to demonstrate that they have a flat-line EEG. EBITDA multiples for companies being purchased by PE firms are near 2007 levels. The week of August 9th produced a record for issuance of high yield bonds. The only sign of domestic job creation is in the hiring of census workers. If England is a nation of shopkeepers, the U.S. is becoming a nation of bookkeepers. The new Dodd-Frank law requiring mountains of new disclosures to the SEC now exempts the SEC from public disclosures, certainly a remarkable irony and a boulder in the path of solving “Freddie” and “Fannie.”
The most interesting new trend is the activist role of the judiciary. Several judges have recently refused to accept negotiated settlements in securities law matters, asking instead that the prosecution explain itself. Since Congress has abrogated its responsibility to thoughtfully address its actions the judiciary is leaping into the role of wise man on behalf of the public. Perhaps the judiciary will weigh in on the pension scandals and determine that jail time is needed for paying bribes instead of fines.
The dominant PE and Venture Capital investor remains the Federal Government as an owner of companies in the auto, insurance and banking industries, as a “shadow” investor in electric cars, batteries and solar power through grants, cheap loans and tax credits, and as a sizeable determinant in moving the present value of demand for consumer goods through programs such as cash for clunkers, cash for appliances and tax credits for housing purchases. Recent data on housing and durable goods illustrate the effects on demand. Unlike actual investing, none of these government actions are measured by any ROI return calculation nor influenced by research in technology or consumer demand.
Trillions of dollars of secondary stock trades are made each year among money managers with no particular public concern. Billions of dollars of commercial real estate quietly trade annually among real estate asset managers. Oddly, now that a significant amount of secondary trading is occurring among Private Equity firms, such trades are being deplored as an evil trend. Yet, if a PE firm were to purchase a corporate division of a public company owned by the same shareholders that provide capital to the PE firm, the transaction would be seen as purposeful, despite, at its core, being a secondary trade between like owners. Since the PE industry now owns a large inventory of assets a reasonable amount of intramural trading should be expected, particularly since they are owned by self-liquidating entities. Fair criticism can be leveled for the wisdom of any purchase on underwriting grounds, but a secondary by itself does not connote evil.
The newest revelations in the California and New York Stock pay-to-play scandals emphasize a few simple questions: 1) Why are new laws required to prevent bribery? Presumably it has been illegal for years; 2) How is paying fines a sufficient remedy? It is simply pricing the risk. Some firms have now paid multiple fines over the last decade, but the behavior clearly was not curtailed; 3) Is it really that hard to raise funds on one’s investment merits?
We have had four simple policy rules since Olympus was formed, in 1988, that have guided us in fund raising and other areas:
1) No personal debt except home mortgage. 2) No stock trades in any of our portfolio companies. 3) No gifts to any politician who could be influential in any of our potential investors’ funding decisions. 4) No use of wireless devices in any meetings (it is rude).
To the credit of the public funds we have encountered, no one has even hinted at a pay for play request.
I’m Rob Morris and I approved this blog.