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Edens: Enhanced regulation is way of the future

The founder and co-chairman of Fortress Investment Group believes heavier regulation of private equity is both inevitable and positive. It's a 'new aspect of life' having the regulators show up, he said.

Regulation of hedge and private equity funds will become a reality to which some firms will struggle to adjust, but ultimately increased transparency will be good for the industry, according to Wesley Edens, founder and co-chairman of Fortress Investment Group.

Edens, speaking at The Deal conference in New York Thursday, said his publicly listed firm has been a registered investment advisor for many years and is used to having the US Securities and Exchange Commission in the offices.

“For a lot of folks, it’ll be a new aspect of life to have the regulators showing up,” Edens said. “There’s still a lot of politics to sort out in terms of who manages what, but it’s an easy prediction to say there will be more regulation.”

Wesley
Edens

More transparency will be a good thing, Edens said. During the financial market meltdown, many people, including Edens, had a panicky thought – where is my money?” he said, “who owns it, what’s the interest? Today, you’re seeing more transparency being dictated.”

The US government and Congress have been discussing ways to regulate hedge funds and private equity funds, including introduction of a bill that would grant US states the power to regulate private equity firms managing less than $100 million.

Under this proposed rule, firms with offices in multiple states under the $100 million threshold could find themselves answering to multiple state regulators, having to interpret and understand the differing rules in the different states.

Edens also talked about his decision to take Fortress public in 2007 as having been important to help attract and retain talent.

“We made the best decision based on the facts at the time,” Edens said. “Having broad-based ownership in the firm gives incentive for people to stick around.

“It’s had its moments,” Edens said about the ups and downs of going public. “But on balance it was a good decision and gives us a lot more opportunity going forward than headaches.”

Fortress’ stock soared after its IPO, rising from $18 to between $26 and $30. The firm’s stock price began to dive in the fall of 2007, when its third quarter earnings showed a $38 million net loss. The firm’s shares were trading around $4.18 midday Thursday.

Edens also said he believes private equity funds will shrink as investors allocate less money to funds in the future. In the past, investors in illiquid assets did not pay as much attention as was needed to liquidity levels, something that came back to bite them in the market downturn.

“The question is, ‘what is the right asset allocation model?’” Edens said. “I don’t think as much attention was paid to the notion of liquidity. When you go through a market like we did, everything becomes correlated. That caused people to stop and say, ‘if I’m trying capital up on an illiquid basis, I need to make sure” I’m careful and pick the right investments.”