Bill Aims for Disclosure by Private Equity

By PETER LATTMAN

The nation's private-equity firms could be forced to register with the Securities and Exchange Commission, while also divulging the value of their funds and names of all investors, in a new Senate bill titled "The Hedge Fund Transparency Act."

Introduced late last week by Michigan Democrat Sen. Carl Levin and Iowa Republican Sen. Charles Grassley, the bill has attracted the most attention from hedge funds. Lost in the debate has been the fact that private-equity firms, which buy and sell corporations using borrowed money, also would be covered under its provisions.

Such transparency has been a bugaboo for buyout firms, which have for years run their businesses outside the public eye.

Several buyout executives say the tone of the Obama administration and a Democratic-controlled Congress suggests private-equity funds and their executives will be ready regulatory targets.

Until now, both the SEC and the Treasury Department have avoided oversight of private-equity funds. Instead, they have sought disclosures from funds in which investors can withdraw money within two years. That excluded virtually all private-equity funds, which lock up investor money for a decade or more.

The Levin-Grassley bill applies to any private fund that has at least $50 million under management, a dollar figure that encompasses virtually every private-equity firm.

The industry has been bracing itself for increased regulation. In recent years private-equity firms raised their profile in Washington, D.C., by hiring Beltway insiders and forming their own trade group. The Private Equity Council, which has 13 of the largest buyout shops as its members, has spent $5.8 million on lobbying since its inception in March 2007 through the end of 2008.

As Congress and the administration craft new regulations, said Douglas Lowenstein, president of the Private Equity Council, "it's important to remember that private-equity investments can play an important role in rebuilding the economy -- and that they did not create the cascading losses that triggered the financial crisis in the first place."

Another issue that could re-emerge on Capitol Hill is the "carried interest" tax, several private-equity executives say. Congress has in the past proposed legislation that would require hedge-fund and private-equity personnel to pay ordinary income-tax rates of as much as 35% on "carried interest" -- a cut of profits they receive -- instead of the 15% long-term capital-gains rate they currently pay.

Ironically, the industry's increased scrutiny comes at a time when private-equity profits have evaporated. After a credit-boom buying binge in which private-equity-owned companies issued more than $1 trillion in debt to fund leveraged buyouts, today many of those companies are choking on all that debt.

In a recent study the Boston Consulting Group found that of 328 private-equity portfolio companies, roughly 60% of their debt was trading levels considered "distressed," or significantly below face value. BCG concluded almost 50% of these companies could default during the next three years, leading to increased bankruptcy filings and layoffs.

This potential shakeout has raised concerns outside Capitol Hill. On Tuesday, to coincide with a meeting of private-equity industry leaders in Berlin, labor leaders around the world held a coordinated press conference demanding increased regulation and greater transparency.

"The LBO binge is over and we're confronted with a very significant hangover," said Philip Jennings, general secretary of Geneva-based UNI Global Union. "We're concerned with the impact that financial engineering in private equity will have on workers."

Write to Peter Lattman at peter.lattman@wsj.com