European Parliament Adopts Somewhat More Rational Private Equity Stance

This week the EU Parliament’s Economic and Monetary Affairs Committee voted through a softened paper on proposed Private Equity regulations. The vote took place after compromises were reached via the inclusion of some 200 amendments. The European Parliament will vote on the issue later this month.

Among the more controversial (and odd) proposals is that leverage should be “fair” for both the buyout firm and the company being acquired and that capital should be held by investment firms according to the level of risk on an investment. The interests of investors and loan originators should be aligned by obliging investors to retain a portion of securitized loans on their books.

Now, how they manage to determine what “fair” is will be entertaining. Are they going to want to place caps on leverage levels? Are they going to come up with some set of debt/equity ratios? This is classic reactionary overregulation. Why would a firm determine to buyout a company if it didn’t think it was possible to meet debt obligations? Obviously you wouldn’t invest if you didn’t think it was a fair and achievable amount. Does this always work? No. But neither do other forms of ownership structures. Let the market dictate what the going rate of “fair” is, not the bureaucrats.

More on this later.

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