Private equity giants take on Congress with billions on the line

Friday , June 01, 2018 - 9:50 AM

Heather Perlberg

(c) 2018, Bloomberg.

U.S. private equity firms are raising record amounts of money in the global market. Congress could derail their gravy train.

In the name of national security, lawmakers are debating a bill that would tighten scrutiny of investments from other countries. An industry group that includes Blackstone Group, Apollo Global Management and Carlyle Group is turning up the heat on Capitol Hill to minimize any possible damage.

Private equity brought in a record $453 billion globally in 2017, according to London-based Preqin Ltd. Some of the largest investors are sovereign wealth funds, which intended to more than double the amount they gave private equity groups over the past five years.

The new law would expand the power of the Committee on Foreign Investment in the U.S., an interagency panel led by Treasury Secretary Steven Mnuchin, that examines deals involving foreign companies and technology that could pose national-security threats.

The American Investment Council, the industry’s main U.S. lobbying group, increased spending on lobbying almost 22 percent to $450,000 in the first quarter compared with the same period in 2017, according to disclosures filed with the government. Blackstone, Apollo and Carlyle also shelled out more cash for general lobbying this year.

The mission of the foreign-investment panel “is important to safeguarding U.S. interests and we agree the process should be modernized,” Jason Mulvihill, AIC’s general counsel, said in an email. But “reforms should avoid needlessly interfering with passive foreign investments in U.S.-controlled private equity funds.”

Private equity’s passive investors wouldn’t be affected by the bill. Lobbyists are trying to ensure that funds set up overseas for tax purposes aren’t hit by the new law, according to people familiar with the matter. There’s also a concern that the government could categorize a fund as a foreign entity if it has a larger percentage of international investors, said the people, who asked not to be identified because the conversations are private.

“Investors would like to ensure that Congress doesn’t inadvertently restrict foreign investment to protect national security,” said Harry Clark, a partner with Orrick, Herrington & Sutcliffe in Washington. “Anyone who’s interested in international investment in the U.S. realizes this is a watershed time where Congress is fundamentally reevaluating” its approach to foreign investment.

Congress will probably pass the bill and have it on President Donald Trump’s desk by the end of the year, Clark said.

Representatives of Blackstone, Apollo and Carlyle declined to comment.

Of the 10 biggest funds to close in 2017, eight were raised by firms based in the U.S., with Apollo putting together the largest, according to Preqin. The world’s top five investors in private equity last year were based outside the U.S., Preqin said. The first U.S. investor on the list was the California Public Employees’ Retirement System, or CalPERS, at No. 6 with $26.9 billion.

Relationships between private equity firms and their investors are changing, adding to complications. Pension funds, sovereign wealth funds and other large investors are giving more money to fewer firms and also seeking more opportunities to co-invest in deals with them. The largest private equity firms are also forming partnerships for specific strategies. Saudi Arabia’s Public Investment Fund agreed last year to commit as much as $20 billion to Blackstone for infrastructure investments.

--Bloomberg contributors: David McLaughlin and Ben Brody .

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