MacFadyen: Contemplating Registration
October 12, 2009
News of the pay-to-play pension scandal may seem like it's getting stale, but these things tend to have a shelf life that extends well beyond our capabilities to stay interested. Last week I had the chance to talk with Ralph Mittl, the former chief of global compliance for the Carlyle Group. He believes that private equity as an industry is just getting a taste of the scrutiny and oversight that will become a normal course of doing business in the asset class.
Remember the scandal over club deals? I'm going back three years, but in 2006, this was creating as much anxiety for GPs as the issue of suspect finders' fees. After a few months, the debate over club deals seemed to disappear. Just some food for thought, but Mittl says he wouldn't be surprised if regulators are actually still working on that one.
"Whenever a case goes to enforcement, regulators are deliberate about wrapping it shut. I think there'll be some cases there once the evidence is lined up," he was quoted for a story that will appear in the November issue of Mergers & Acquisitions.
For the larger firms, especially those that are public, this scrutiny won't have a huge impact. Many of those groups already have team of compliance officers, not to mention the lawyers and public relations officials to deal with the transparency and oversight. It's the middle- and small-market firms that will probably face the biggest shock when they're finally forced to register with the SEC.
It's a bit ironic that private equity firms, in the wake of Sarbanes Oxley, used the high cost of compliance as a selling point for companies considering a move off of the public markets. It makes me wonder how smaller firms will account for the increased scrutiny.
Mittl's new firm, Patomak Partners, which he founded with former SEC commissioner Paul Atkins, will provide one avenue for sponsors looking to get up to speed, and I imagine other groups will also emerge.
I'm also curious if this could increase the appeal of pledge funds. It remains to be seen at which threshold GPs will be forced to register, but it seems for the smaller groups out there, it might make sense to stay small and raise capital on an as-needed-basis.
In the October 5 issue of New York Magazine, Adam Sternbergh wrote about the psychology behind being cheap. He cited a couple of studies and other research exploring what drives people to either spend or save. The part I found the most interesting was an MIT experiment that looked at the brain scans of subjects confronted with purchasing decisions.
"When a subject saw an item he wanted, it activated his nucleus accumbens, which is the area of the brain associated with anticipating or experiencing pleasure, such as eating a piece of cake. But when he saw a price he didn't like, it activated the insula, the portion of the brain that reacts to unpleasant shocks, like a bad smell."
I can see this. When my wife spends $80 on a pair of jeans, there is a physical effect that I can definitely feel. I can't really verbalize it, exactly, but it's there, creating a numbing sensation somewhere between my gut and xiphoid process. Alternatively, when I spend $80 on a round of golf and an ensuing round of beers, I can just as acutely feel my nucleus accumbens kick in.
The problem is that I have no idea whether this makes me a tightwad, a spendthrift or a selfish combination of the two. At least now I have a name for it when I have an urge to kick out for new sneakers.
I'd be curious how this works in M&A. I'd guess this is why trophy properties, such as sports teams and investments in new technologies (i.e. Twitter and Facebook), are able to fetch prices that lie well outside of any rational financial model.
An interesting trend seems to be emerging in which non-healthcare companies buy into the healthcare space to get exposure in the sector, which apparently has no ceiling. We saw it first with Dell, whose $3.9 billion Perot Systems acquisition effectively gives the buyer a foot in the door, as nearly half of Perot's revenue comes from healthcare. The deal also came just a few weeks after the company launched the Dell Affiliated Physician EMR offering.
The latest "non-healthcare" healthcare deal was Kimberly Clark's acquisition of I-Flow Corp, a pain management and drug delivery outfit. The paper and cardboard giant, which paid $324 million for the company, has cinched other healthcare deals in the past. Last October, for instance, it acquired Baylis Medical Co.'s pain management business, so it's not exactly foreign to the space.
Still, it seems like an interesting way to chase after growth. It's just an idea, but I've heard that newspapers can be used as a home remedy for ear infections, and cars can serve as a makeshift sleeping aid for infants.
I'm going to blame Sarah Palin for this one. After securing an interview with Mitt Romney I agreed to let the former presidential candidate review my questions. My guess was that he didn't want to be surprised if I asked him about his daily reading habits. I honestly thought I was throwing some softballs at him, but apparently I still hit a nerve. He declined the interview about two hours after I sent my questions along.
To ensure that my Columbus Day effort isn't completely wasted, I figured we could speculate about which question in particular scared him off. I pasted them below. I'm guessing it was No. 5, but No. 10 would be my dark horse.
1-- Timothy Geithner in September declared victory for TARP. What are your thoughts on the successes and failures of the program, and what is going to be the result five years down the line?
2 -- How do you view the current administration's handling of the economy?
3 -- As it relates to oversight and regulation, do you think the current proposals -- be it compensation caps, registration for alternative assets, et cetera -- will do anything to prevent another bubble?
4 -- Alternatively, does the decision to save the likes of AIG and come to the rescue of others, such as Merrill Lynch, embolden institutions to take on an excessive amount of risk?
5 -- The Republican party seems to have been swept up in Tea Party politics. Is this the direction where the party is headed or, rather, is it a last push to maintain a grip on the party whose future will be to again focus on less government?
6 -- You've been a critic of the McCain-Feingold law, and this past presidential election seemed to showcase how cloudy campaign finance can be. It raises a lot of questions when people start to consider the drivers of healthcare reform, card check legislation, et cetera. How would you propose to eliminate special interests?
7 -- In your run for president, you were a proponent of free trade with China and Asia. How do you see the country keeping pace with these regions?
8 -- In the VC community, there is a lot of fear about where our innovation economy is going -- whether it's increased capital gains taxes, an immigration policy that pushes entrepreneurs out of the country, or legislation that fails to recognize the connection between IP protection and innovation. How do you see the US maintaining its standing at the forefront of innovation?
9 -- The federal deficit continues to grow. How can we trim the deficit without a tax regime that snuffs out any kind of recovery?
10 -- Stephen Pagliuca recently announced his bid for Ted Kennedy's Senate seat, following a path you paved a long time ago. How does private equity as a career prepare someone for politics? I would guess that an ability to multi-task and absorb and understand information has to set a strong foundation?
11 -- What are some surprises that await people making the jump from business to politics?
12 -- I realize it's been awhile since your Bain days, but I was hoping you could comment a bit on the role the firm has had in the private equity market. There have been more than a few firms that have been spawned out of Bain and the model seems to withstand the test of time and market dislocations. Can you take me back a bit to the thinking when you founded the firm.
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