9/22/2013 @ 2:42PM
Obama’s Hedge Fund Free-For-All
After a wait of almost 18 months, the acronym-friendly Jump-start Our Business Start-ups Act (or JOBS Act for short) will go into effect on Monday, September 23. When President Barack Obama originally signed the law in April 2012, most observers took the new law at face value. Supporters insisted that it would undo many of the impediments to initial public offerings (IPOs) that were the direct consequences of the Sarbanes-Oxley Act, originally passed in 2002, and would significantly revamp the way in which private capital is raised in the United States, thereby creating jobs and fostering growth.
After much delay and procrastination, the Securities and Exchange Commission (SEC) finally adopted rules in July to implement these changes, months after the Congressional-imposed deadline had past. Experts, however, began feverishly focusing on another group of beneficiaries to the JOBS Act liberalizations – namely, alternative investment vehicles, such as hedge funds and private equity funds.
Despite the lingering anger and suspicion that many on the Left direct at the financial sector, Obama and his Administration have very close ties to these funds. This could come as a surprise to those who followed the attacks on Republican challenger Mitt Romney during the 2012 Presidential campaign. To instinctively categorize private equity professionals and hedge fund managers as dyed-in-the-wool Republicans would be seriously mistaken. Like Wall Street generally, Democrats are well represented in the alternative investment management industry.
Under the SEC’s proposed JOBS Act rules, hedge funds and private equity funds will now be able to more easily obtain money from those “accredited investors.” An accredited investor includes individuals who earn more than $200,000 per year or have more than $1,000,000 in net worth, excluding their family home.
Historically, anyone approaching prospective investors in connection with privately-placed securities had to have a substantial pre-existing relationship already in place. The statutory exemption would lost if, for example, advertisements or articles were published in a newspaper or magazine, or interviews or notices were broadcast on television or radio. Post-JOBS Act, anyone can be approached as long as it is determined before they actual invest that they are really accredited investors.
As of Monday, commercials advertising a new hedge fund launch can be run during episodes of “Monday Night Football” or “The Walking Dead.” Glossy photo-spread can now appear in magazines such as “Vanity Fair” and “Rolling Stone.” Perhaps the naming right to your local professional sports stadium? Perhaps a blimp floating above that stadium on game day?
The JOBS Act now opens the door for more investors to put their money to work with alternative investment funds that operate at the “very pointy end” of capitalism. Underlying the dollar thresholds for accredited investors is the belief that they can “fend for themselves.” Some critics, however, have argued that the fact that so many sophisticated investors fell victim to Bernard Madoff’s infamous Ponzi scheme is evidence that, in fact, such investors are either unable or unwilling to protect themselves. Post-JOBS Act, Obama places responsibility for these investment decisions squarely in the hands of these investors.
Interestingly, at the same time that Obama was permitting the mass-marketing of hedge funds and private funds, he was also out on the campaign trail trumpeting their perceived shortcomings.
For example, an Obama campaign ad labeled Republican challenger Romney as “outsourcer in chief,” focusing on Bain Capital companies that relocated jobs to China and India. He eventually went on to compare Bain Capital to vampires. During the summer 2011 debate over carried interest taxation between Warren Buffett of Berkshire Hathaway and Steve Schwartzman of Blackstone, Obama made clear that he sided with Buffet, “How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries. It’s not fair. It’s not right.”
However, despite the campaign rhetoric, a number of high powered and respected private equity and hedge fund figures previously backed Obama during his first run for the White House in 2008, including Hamilton Jones of Blackstone, Paul Tudor Jones of Tudor Investment Corporation and Eric Mindich of Eton Park Capital Management. In 2012, despite his boss’s high-profile support for Romney, Blackstone president Hamilton James again put his weight behind Obama, while at the same time criticizing the politically motivated attacks on private equity that have been launched by anti-Romney forces.
The Obama Administration is also no stranger to the revolving door between public service and private equity, although many of its supporters would probably prefer an image of greater distance between Pennsylvania Avenue and Wall Street. In 2011, Cathy Zoi, Obama’s undersecretary for energy and assistant secretary for energy efficiency and renewable energy, left his Administration and joined the private equity firm Silver Lake. Jeffrey Goldstein soon returned to private equity giant Hellman & Friedman after two years serving as undersecretary for domestic finance in Timothy Geithner’s Treasury Department. In addition, Sanjay Wagle left Vantage Point Venture Partners for a position in the Energy Department, although controversies would arise over the manner in which government money was allocated to clean energy funds. Karen Gordon Mills, from the private equity firm Solera Capital, was selected to head the Small Business Administration.
Steven Rattner, Obama’s auto-czar and co-founder of private equity firm, Quadrangle Group. defended private equity in 2012, “Whatever its flaws, private equity has made a material contribution to sharpening management”
Only one year before Obama signed into law of the Dodd-Frank Act, his comprehensive Wall Street reform package, he had infamously remarked to a banker, “My administration is the only thing between you and the pitchforks.” The surprise adoption of the JOBS Act in April 2012 signaled an abrupt change in the direction of financial regulation in the United States after a decade of ever expanding rules and prohibitions.
Despite the political utility of “tough talk” while on the campaign trail, Obama has not demonstrated the complete aversion to hedge funds and private equity funds that others in his party might prefer. The arguments in favor of these funds, in terms of either the additional liquidity they provide to financial markets or of the ability to turnaround struggling businesses, are regularly made by others across the political spectrum.
With inclusion of these funds within the JOBS Act, Obama has demonstrated that, despite the rhetoric that was so effective in securing a second term, he believes hedge funds and private equity funds have legitimate roles to play in a growing economy. This is an important concession as the pendulum of financial regulation swings away from more intervention and towards an increased reliance on investors to protect their own interests.
The author’s book, “ONE STEP AHEAD – Private Equity and Hedge Funds After the Global Financial Crisis,” is published by Oneworld and is available in bookstores across the United States and Britain.
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