Two weeks ago, we discussed how the head of the SEC’s examination unit, Andrew Bowden, gushed about the private equity industry at a conference at Stanford Law School, including joking about how he’s told his son to work in the industry.
This appalling example of regulatory capture has been reported widely, including by Bloomberg, the Los Angeles Times, International Business Times, Matt Taibbi, Bill Black, Bill Moyers, and over the weekend, in a nationally syndicated column by David Sirota. And it’s even more glaring since it was Bowden last May who called out widespread private equity misconduct in unusually specific terms, and later told the New York Times’ Gretchen Morgenson that “investors’ pockets are being picked.”
Defenders of Bowden might argue that he had the government official version of a bad hair day, attempting to inject some levity in a dry conference and having the remarks go wildly off the rails.
But it turns out that Bowden has been making the same type of statements, save the “Gee it would be great for Cole to work in private equity” part since at least last fall. Occupy the SEC member George Bailey sent us this section from an interview with the industry magazine Private Equity International last September:
Broadly speaking, private equity has a great business model. Over the last 20 years or so the returns are strong on an absolute basis and relative to most other asset classes. So when you sit back and think about all of the people in the world who are engaged in money management private equity has added a huge amount of value. On the whole, they’ve delivered for their clients. Because of that and the business model they’re also doing well for themselves.
People think that after the speech that we looked at private equity firms and thought they make too much money. That’s not it at all. I am fascinated by the people who are doing well for their clients and themselves, they have a great business, but they will risk losing the trust of their clients or getting crossways with us.
“People” refers to the private equity firm employees, and not their often-abused investors.
An interview is a more careful process than remarks on a conference panel, so this extract makes clear that these comments on private equity margins and returns are part of Bowden’s general patter. In fact, if you read the entire interview, many of the things he said there he repeated close to verbatim in his Stanford panel.
His remarks are already deeply disturbing for showing insufficient distance from the industry he oversees. As Matt Taibbi put it,
….it reveals an attitude that’s absolutely poisonous among regulators, this fawning worship of people on Wall Street who maybe break a few rules, but that’s okay, because they make tons of money! Can you imagine Elliott Ness giving a speech gushing over what nice cars Al Capone drives? It’s revolting.
Even worse, Bowden’s statements are flagrantly inconsistent with long-establihed SEC policy. Investment advisers are instructed not to present SEC examinations as an endorsement of their firms or investment strategy. Yet here we see Bowden doing precisely that, and presenting inaccurate information to boot. Bowden made comments similar to the ones in the interview at other times in the Stanford panel. For instance, at 16:50 in the full panel video, “It’s delivered market-beating returns over the past 10 years.” That’s not true if you adjust for risk, as we explain long-form here, so Bowden, operating from a position of authority, is actively giving out misleading information.
And this line of discussion is unnecessary. Bowden takes this line of argument to deal with grousing by the private equity industry that the SEC doesn’t like how much money they make. Bowden shouldn’t even indulge that effort to depict the SEC as motivated by a vendetta or jealousy. All he needs to do is stress that it was the industry itself that devised their legal agreements, and the SEC is simply making sure they honor them. Private equity profits and investment performance are utterly irrelevant.
Moreover, as George Bailey points out, Bowden is also undermining the goals of the exam process as he articulates them. From the PEI article:
“When we do an exam, we’re looking to see if you’ve fairly and fully described your investment programme, and that are you sticking to it. That’s one of the things we see from time to time: a GP says they’re going to do a programme that is A, B, and C, but they really do D, E and F.
The second part is fees and expenses – so we’re also looking to see if that part of the bargain is fully and fairly described to investors.
The third part is that a fiduciary’s responsibility is to describe to clients where there is a conflict of interest. So we’re looking for people to fully describe those conflicts and what they are doing to mitigate them if they exist.
I think if you focus on those, you’ll probably stay pretty busy and make it through the process.”
As we’ve pointed out in our limited partnership document release and in subsequent posts, there are numerous elements of the agreements that are unduly vague or complex, and where the investors’ understanding of the deal is wildly different than what the general partners assert that it is: clawback language that virtually never results in actual cash payments of clawbacks, individuals that the investors thought were employees of the general partner instead being charged to the fund’s companies as consultants, and fees being charged to portfolio companies after a deal was sold but not being rebated to the limited partners.
And as for managing conflicts, see our post today on Hamilton Lane, which also discusses how Hamilton Lane, a fund owned by Blackstone’s Tony James, and Carlyle are owners of a software company designed to allow general partners to tamper with the financial records of the portfolio companies. This is a far more serious conflict of interest than just the presumably modest profits; its that it facilities another means of cheating investors.
For the SEC to identify such widespread abuses and then have its most visible spokesperson on that beat engage in clear-cut policy violations and poor regulatory practice is reprehensible. What use is it to find abuses only to then tell the perps that they are really special and that bad deeds are no biggie?
This is defining deviancy down among what passes for our elites, both Bowden himself and the private equity firms he regulates. If you haven’t done so yet, please call your Senators (phone numbers here) and Representative (phone numbers here) and tell them it’s time for Mary Jo White to get regulators who are willing to do their job.