We’ve had (depending on when you define the starting point) at least two decades of a concerted push by the US towards more open capital markets (no doubt based not simply on the belief that the Anglo/Saxon model was superior, but also on the notion that US financial firms would come out on top).
Many orthodox economists will concede that restrictions on capital flows and trade can be beneficial for developing economies, but would not endorse them for mature ones. Yet the Panglossian faith in wide open capital markets airbrushes out a few inconvenient considerations. One is that the extensive historical dataset constructed by Carmen Reinhard and Kenneth Rogoff shows a strong correlation between high levels of cross border capital flows and bank crises. Two is that high levels of international money flows poses more than a wee problem of national sovereignity. How do nationaly based financial regimes regulate firms with global operations?
The Financial Times reports on a move afoot in the EU that will restrict investors in the EU from putting funds in private equity firms outside the EU, and also restricting the ability of foreign investors to buy European companies (frankly, as someone who has worked on more than a few cross border deals, a good business generally has no trouble finding domestic buyers. If local/regional players, who presumably have an information advantage by knowing the local market, won’t stump up for a particularly business, why should an offshore investor do better? Yes, there are always exceptions, but one needs to be plenty wary).
Reader Swedish Lex noted:
In parallel with the Greece/Goldman/default swaps/hedge fund vampire night dinners, etc., the EU is slowly advancing on the proposal to regulate hedge funds and private equity firms (and their managers).
The industry has spent vast recources over the past year in trying to water down the draft legislation, which was not entirely brilliant to start with. What seems to elude the industry is that all the bad press feeds back into the legislative process. Most of the 736 Members of the European Parliament had a vague understanding of this aspect of the financial industry to start with and, probably, believe that it has significantly contributed to the financial crisis. The very bad PR for hedge funds and over-leveraged and job slashing PE firms over the past weeks are hardly helping the industry.
What I find silly is that the Industry, in its efforts to convince the Parlamentarians, and the other relevant EU Institutions, are using the same bad old arguments like if you regulate in Europe, it will scare off investment and the pensions of ordinary people are jeopardized. Well yes, the EU does not welcome trashy short-term cancerogenus cash spreading from Cayman funds run by math nerds that design real nukes one day and their financial equivalent the next.
There will be a compromise in the end, but it is too early to say what it will be. Greece etc. could continue to have an interesting influence on the debate.
From the Financial Times:
Europe risks building a protectionist wall between itself and the global private equity industry if plans for a sweeping overhaul of regulation in the sector go ahead, some of the world’s biggest institutional investors have warned.
The warning from the International Limited Partners Association, representing 220 of the biggest pension funds, endowments and sovereign wealth funds, comes at a sensitive time with European Union lawmakers and member states close to agreeing new rules
Investors based in the EU could be barred from investing in private equity funds based outside the 27-country bloc, said the ILPA, whose members have more than $1,000bn (£667bn) invested in private equity worldwide.
In addition, the proposed regulation could “severely disturb” many of the world’s biggest private equity groups by depriving them of access to EU investors, while in turn reducing foreign investment into EU companies.
“Not only will EU investors have reduced access to non-EU private equity managers, there exists a real concern that the proposal will effectively close Europe off from the capital solutions . . . that comprise the global private equity industry,” it said.
Yves here. The chutzpah is breathtaking. Foreign firms are trying to bully EU officials? This is a great way to win friends and influence people. So what if they are severely disturbed? Europe functioned before there ever was a PE industry, and from what I can tell, its hotbed of innovation, the German Mittelstand, does not have much traffic with PE investors.
The idea that what is good for the private equity industry may not be good for the average citizen appears not to have occurred to these operators. Tone-deaf behavior like this ILPA letter is only good to feed the already high suspicions of about whether financiers have any social conscience.