European private equity executives are preparing for a monumental battle with EU legislators over the future of their industry as a result of the dramatic political mood-swings in Brussels that have resulted from the global financial crisis.
According to industry practitioners familiar with the current sentiment in Brussels, there is huge political pressure on Charlie McCreevy, the European Commissioner for the internal market and services, to deliver tough measures to reign in private sector financial institutions.
McCreevy has previously distanced the asset class from the causes of current financial markets crisis, calling private equity an important force for stabilising the European economy. However, some industry professionals are now worried private equity will get caught inadvertently in a regulatory backlash intended primarily for other types of institutions held responsible for the scale of the crisis, such as banks and hedge funds.
“Private equity’s moment of truth is now approaching,” said Marc St John, a partner at CVC Capital Partners and a member of the European Private Equity and Venture Capital Association’s executive committee.
During a keynote address at PEI’s COO and CFO Forum in London today, St John urged the industry to engage in what the EVCA and other European trade groups now consider a vital lobbying effort, and pointed to pending proposals from the European Parliament aimed expressly at private equity and demanding the introduction of curbing measures. Under the plans, private equity faces the introduction of capital requirements, binding disclosure and transparency, controls on asset stripping and capital depletion, caps on leverage and limits on director remuneration.
The proposals are currently being reviewed by the European Commission, but due in part to Commissioner McCreevy’s pro-private equity stance have seemed unlikely to become the basis for new laws.
However, St John said recent events in the wider financial marketplace had increased the political will in EU political circles to regulate: “There is a genuine danger that private equity may get swept up in the general hardening sentiment towards oversights of the financial services industry.” The worst-case scenario of the industry becoming collateral damage in a full-blown regulatory onslaught on financial services would be the “collapse” of the private equity business model, he said.
Cormac O’Haire, chief financial officer of London-based private equity firm Terra Firma, told delegates: “This is more than a threat. It’s very real, it won’t go away, the Commission is facing a tidal wave of political pressure to regulate. Three weeks ago we were winning the argument in Brussels about private equity, but now the danger is getting caught up in what’s happening to the banks.”
EVCA and several national industry associations have created a special task force charged with recommending how the industry should react to the European Parliament’s plans for the industry.
The European Commission is due to respond to Parliament on 21 November. “The task force has a short period in which to act. But we can take a longer term perspective in building our industry’s rightful reputation as a valued part of the economy,” St John said.