As the letter below shows, eight prominent Senators cleared their throats and asked the SEC why it has yet to produce an investor bulletin on private equity, which they observe is puzzling given that the agency has uncovered plenty of gambling in Casablanca.
It is important to understand that the SEC’s failure to issue any investor bulletins on private equity, which are “focused on topical issues including recent Commission actions,” much the less investor alerts, which are “focused on recent investment frauds and scams,” confirms how half-hearted its enforcement efforts have been. The SEC warned of widespread abuses in private equity in May 2014. That speech by then SEC enforcement chief Andrew Bowden was followed quickly by a series of high profile articles in the New York Times and Wall Street Journal that implicated the biggest names in the industry.
Investor bulletins are a basic tool that the SEC uses to keep investors appraised of abuses and consolidates their work on enforcement actions. As a result, several individuals, such as private equity expert Eileen Appelbaum, have suggested to SEC officials in meetings that they issue an investor alert on private equity. Every time, the staff have made a big show of reacting like they never heard the idea before and that it is certainly worth thinking about. It’s ludicrous for them to have pretended that this was a novel suggestion They can no longer play that game now that these Senators have weighed in.
On the one hand, it’s yet another poor reflection on the SEC that eight Senators have had to team up to get the agency to do its job. As their letter makes clear, in bureaucratese, the SEC has no defense for its inaction. One of the excuses that SEC officials have invoked when pressed for their failure to act has been that investors in private equity are big boys (“accredited investors”) and are therefore sophisticated and don’t need this sort of help from the SEC. But as the Senators point out. the SEC has issued investor bulletins for the hedge fund industry, which like private equity, is newly subject to SEC registration as investment advisers under Dodd Frank. And hedge funds, like private equity, target big, professional investors.
On the other hand, while it may seem like overkill for a group like this to go after the SEC on what seems like a minor matter, it is key to see this as a significant shift in the zeitgeist. Private equity abuses have long rested on two factors. One is the industry’s claim to a privileged status, which it’s managed to wrap in its mantle of “private”: “What we do is private, and therefore any intrusion interferes with the fundamental operation of our business model.” That’s clearly an insane and unjustifiable position, yet when you push through the puffery and jargon, that is the underlying logic of the industry’s defense. And it succeeded for decades because the huge profit potential of working with or for private equity firms meant no one would violate their code of omerta. The private equity industry succeeded in suborning academics (private equity is alone among investment strategies in having the faculty members that specialize it act as cheerleaders or faux-objective apologists rather than skeptics). In addition, the overwhelming majority of press stories are from the trade publications, which by nature are industry friendly. That meant this tidy and self-serving, “We are really really special and deserve to be left to our own devices” narrative has gone unchallenged for a remarkably long period of time.
The second factor is that private equity principals are so wealthy that it seemed inconceivable that any elected official would dare to cross them. But the irony is that unlike members of regulated industries, like banks and real estate, private equity has heretofore not needed to cultivate friends in powerful places. True, there are plenty of political kingpins who are large donors and bundlers, but they are involved in politics most of the time out of an interest in imposing their view of society on the electorate rather than advancing the interests of their industry. The private equity industry has a teeny lobbying group, formerly known as the Private Equity Capital Growth Council. It was recently rebranded as the American Investment Council. So the official lobbying group now has to distance itself from private equity via a name change? That’s another proof that private equity is losing its luster. But as before, the organization has a very small budget, and its talking points are tired and persuasive only to true believers.
In other words, this letter is an indicator that private equity is being deligitimated. And as its returns fall, which top industry players have warned will happen, it will also lose its allure to investors, as has happened dramatically with hedge funds this year.
And a final factor to keep in mind: while it’s more appealing to think of mighty forces rising up to combat a powerful industry like private equity, Gulliver was tied down by Lilliputians. It may not be as gratifying to go slowly and systematically after private equity abuses and misrepresentations, but it is already starting to have an effect.