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September 2020
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PE Panorama: More stain on private equity

Private equity
By Paul Mackintosh   
August 10, 2020

News of top officials in the US Labor Department pushing to open 401(k) plans to private equity is looking sketchier after recent reports of a Federal Bureau of Investigation probe into money laundering through alternative assets programmes. According to a leaked intelligence bulletin from May quoted by Reuters and other news media, the FBI has made a “high confidence” assessment that “threat actors” – criminals and hostile organisations – have been using the private placement structure of private equity investment to reinsert their ill-gotten gains into the legitimate financial system.

The FBI bulletin quoted figures in the hundreds of millions of dollars from planned or actual incidents, and warned that private equity firms lack the mechanisms to screen for money laundering.

This comes on top of a June 23 risk alert from the US Securities and Exchange Commission which highlighted extensive compliance deficiencies in actual private equity practice: in conflicts of interest, fees and expenses, and personal trading. The alert was based on actual cases, many of them leading to SEC enforcement actions.

Private equity is already known to be a risky asset class by virtue of its direct investment structure. Then there are the risks highlighted by the SEC. On top of the known risks, we now get served fresh ones, courtesy of the FBI.

All the same, we have a commentary in Barron’s on July 24 by Patrick Pizzella, the deputy labor secretary, headlined “Main Street Deserves Access to Private Equity, Too”. His rhetoric couches this in terms of some crusade on behalf of the little guy, stating that “the Trump administration and the Department of Labor are committed to doing everything within their authority to bulldoze barriers that disadvantage Main Street”.

SEC Chairman Jay Clayton has also been pushing to open private markets to public investors since soon after his appointment in May 2017 by President Donald Trump.

Forbes is quick to make the connection in an article by contributor Edward Siedle on July 26 headlined “Trump DOL, SEC Hell-Bent Upon Pushing 401ks To Gamble On Private Equity”. You’ve got to wonder where the conflicts of interests stop when the gamekeepers are stumping on behalf of the poachers.

The SEC’s own alert hardly paints the asset class in the most attractive light. FBI investigations aren’t exactly going to help fund performance either. And in the middle of the coronavirus crisis, you’d really imagine that the Labor Department had more important things to do than act as the private equity industry’s stooge.

If some private equity companies or industry bodies have been working on the department, then that’s the kind of practice that could backfire on them badly in a post-Trump US, as well as further reinforcing the negative image of the industry already reinforced by the SEC alert and the FBI bulletin. Perhaps it’s time for private equity to clean up its lobbying, as well as its compliance and anti-laundering acts.