The Financial Choice Act, a Republican proposal to reform the financial regulatory system, would see the SEC switch its “scarce resources” away from private equity in favour of protecting retail investors.At least one private equity investment contributed to the financial crisis. Carlyle Capital Corporation (CCC) imploded in March 2008, six months before Lehman Brothers fell. The Carlyle Group birthed and nurtured Carlyle Capital Corporation, a highly levered "safe" bet on mortgage backed securities. Carlyle turned its back on CCC, claiming no role or responsibility for it's huge failure.
It states that “although private equity funds did not cause nor contribute to the financial crisis, Dodd-Frank imposes burdensome requirements on advisers to private equity funds, which unnecessarily punishes their investors and impedes job creation”.
The burdensome requirement the SEC placed on private equity underwriters is that they charge their stated investment fees and no more. SEC's Andrew Bowden talked tough on PEU fee dalliances but softened his stance under the prospect of private equity employment for his son.
The Trump team wants to do one better than Obama's private equity regulator who kicked sand before running away. Trump's Treasury wants to fold up the PEU review tent, no surprise since the President scattered private equity underwriters among his cabinet picks.
High leverage, poorly collatoralized loans and credit seizure can begin in any asset class and spread like wildfire. Private equity is at higher risk for participating in the next crisis given deal multiples, the need to rollover affiliate deal financing at regular intervals and their wide freedom to value holdings at something other than mark to market.
President Trump;s team can service his PEU friends but that doesn't make the world a safer place. It returns us to conditions in place before September 2008.
