The House Financial Services Committee pushed ahead a bill designed to exempt advisers to certain private equity funds from the new registration requirements imposed by Title IV of the Dodd-Frank Act. The Small Business Capital Access & Job Preservation Act was presented last session, and Congressman Hurt has brought it back again.
Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds, provided that each such fund has not borrowed and does not have outstanding a principal amount in excess of twice its invested capital commitments.
It’s a nice effort, but the proviso on debt makes me scratch my head. In addition, the bill leaves it up to the SEC to come up with the definition of a private equity fund. For real estate funds, the big question is whether the mortgage debt on the subsidiary assets is counted in the borrowing limit. This issue raised its head during the Form PF filings for fund managers back in April.
The other issue is the treatment of a subscription credit facility. Private equity funds will ofter enter into a loan secured by the investors’ capital commitments. The fund can draw capital from the facility and then later use capital calls to pay down the facility. The facility is a benefit to the fund and its investors. The fund has quicker and easier access to capital for transactions, through a facility draw request instead of a capital call. By the fund using the facility, the investors are subject to less frequent capital calls and the fund manager can give investors a longer plan of when capital will likely be called.
To the me, the proviso is in direct conflict with the use of a subscription credit facility. The 2x limit is based on invested capital. That would mean keeping capital calls ahead of the facility draws instead of behind the facility draws. The first investments would have to be made with capital calls to keep below the 2x limit.
Private equity lost this exemption and venture capital gained its exemption during the passage of Dodd-Frank. Too much of the discussion of private equity focused on the subset of leveraged buyouts. Private equity was hung with the label of over-leveraging companies, failure leading to bankruptcy, and workers out on the street.
The opposition view in the committee report of the bill focuses on the need for systemic risk analysis and the intersection of private equity with the JOBS Act. One proposed amendment would have limited the exemption to firms that do not use general solicitation.
I’m skeptical that this bill will go anywhere unless it gets hooked into a larger bill. The White House has threatened to veto the bill. Senate Democrats, who hold the majority in the Senate, have given no indication that they want to undo parts of Dodd-Frank.
UPDATE:
The House passed the bill 254-119.
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