EU regulation of private equity: results and prospects
Following 18 months of negotiations, the first-ever legislative regulation of private equity through a binding Directive was adopted by the European Parliament at the close of last year and will come into effect in 2013. What’s in it for workers?
The Alternative Investment Fund Managers Directive (AIFM), imposes specific regulatory requirements on private equity and hedge funds, as well as real estate funds and speculative funds more generally.
The AIFM Directive is the outcome of a political initiative launched some four years ago - at the height of the buyout boom - to contain the debilitating impact of leveraged buyouts on companies, workers and unions together with the heightened risk injected into the wider financial system through the growing size and scale of the buyouts.
An ambitious political agenda incorporating key trade union concerns was formulated in a report prepared by the Party of European Socialists (PES, the umbrella group of EU social democratic and labour parties, presided by Poul Nyrup Rasmussen) to which unions, including the IUF, contributed both analysis, case studies and concrete proposals for regulatory changes (see e.g. IUF at the European Parliament Highlights Dangers, Risks of Private Equity Buyouts).
As concerns private equity, important elements of that agenda - limits on leverage, measures to defend against asset stripping of acquired companies through “dividend recaps” and other devices, concrete reporting requirements which would give workers and regulators a genuine view of the state of the company - managed to survive the severe amending inflicted by hostile MEPs when it was finally adopted in September 2008. Adopting the report was the first stage in the development of a directive.
Two years and 1,700 amendments later, what remains? There is no doubt that intense lobbying by the funds succeeded in stripping the directive of much of its intended content and consequences.
What remains is, first, the recognition in law that private equity poses a distinct challenge requiring specific regulation. That in itself is a significant victory over “light touch” and “efficient market” ideology. The directive, in the words of the PES, “Is the first piece of legislation to enter into force within the framework of European supervision and the first piece of comprehensive legislation on the direct supervision of alternative investment fund managers (and indirectly of their funds).”
Second, it does enumerate specific rules on transparency and disclosure which will, at a minimum, prove a useful starting point for both workers and regulators.
Third, while it will not ultimately prevent the weakening and even destruction of viable companies we saw in previous buyout booms, it does contain concrete language on what is specifically described as “asset stripping”. Private equity funds may not pay out dividends or engage in other means of “capital reduction” for their first two years of ownership. The measures are limited in scope and in time, and only apply to large companies, but the adoption of a specific article on asset stripping constitutes another legislative first and recognition in law that specific regulations are required to contain financial vandalism by speculative funds.
While it does not set limits to leverage per se –the key component of a leveraged buyout – managers of funds above a prescribed minimum are obliged to communicate their leverage levels to national authorities, who may respond if the level is deemed to pose a systemic risk.
The glass is considerably less than half full – in fact it’s barely above empty - but there is at least a glass still standing in the face of a well-funded international lobby. Beyond the fact that the directive simply exists as testimony to the recognized need for a specific response to a previously immune form of activity, there is also the inclusion of a review mechanism which kicks in in 2017. The last word has not necessarily been said. This is crucial, because with interest rates low and investors again flush with cash, the stage is set for a resurgence of LBOs..
A successful transfer to new private equity owners of the services provider ISS, a company which is now on the auction block together with its half million employees, would signal that buyout activity is poised to break loose from the small scale deals which the financial meltdown imposed. And workers will have to again confront the attacks this will bring on jobs and conditions at a time of huge unemployment and savage cuts in public spending. .