Last week, venture capitalists perked up when reform out of the House of representatives carved out VCs falling under the tight scrutiny that private equity and hedge funds are soon to endure.
If you’d like to read about the regulation issue, it’s part of my letter to Obama on innovation policy blog a while back.
Yesterday, however, we’ve another battle to fight and it’s with the Private Equity Council. The PEC is the lobbying group for the dozen or so largest private equity firms in the world. Their mouthpiece, Doug Lowenstein, in prepared remarks said: “We have and continue to support requiring registration of managers of private equity, venture capital and hedge funds.”
It sounds nice on the Hill and I’m sure many people will applaud Mr. Lowenstein’s desire to let the government monitor his firms actions, but is this altruistic or are there other ulterior motives going on here?
What he doesn’t tell you is this:
1. He only represents the largest of the large funds. You know, the guys who can easily take down $50 to $100m in management fees (each person) per year? What’s a couple extra million out of your pocket for compliance issues especially when you know that this financial burden of regulation and compliance will cripple your smaller competitors?;
2. His clients are the ones who used risky leverage to cause some of the disruption in the economy that we’ve seen. VCs don’t use leverage. And in fact, our $28 billion dollars deployed as an industry last year is a pittance to what these funds can deploy in a single investment, if they wish. I think Terry McGuire, Chairman of the NVCA says is best when he argued that defining a venture capitalist — as opposed to a hedge fund or private equity investor — could be done using the Treasury’s guidelines for systemic risk, which identifies things such as leverage and counterparty risk.
So what might seem like a noble effort to be transparent and do “their part” seems hollow when one looks at the benefits they’ll gain by hurting their competitors, helping to harm an asset class that doesn’t introduce systemic risk in to the economy (VCs) and allows them to get off the hook for the previous injuries they’ve created in the macro economy.
Don’t support the hype. Realize that club of a dozen or so massive PE firms is not the voice that we should be listening to support innovation and a healthy economy in this country.