The default risk of companies owned by private-equity firms is 2.5 times that of their public counterparts, according to data collected from banks, insurers and asset managers by analytics firm Credit Benchmark, the Wall Street Journal reported. Private-equity firms use leveraged loans, rated below investment grade, for the financing of buyouts of target companies. Financial institutions raised their estimates of the average probability of default—or nonpayment—for such loans to about 6 percent in September from 5.44 percent a year earlier, according to the data. Lenders surveyed by Credit Benchmark assigned a 2.36 percent default probability to leveraged loans of public companies in September, compared with 2.28 percent a year earlier. The finding comes as worries mount about a turn in the credit cycle and a rise in corporate distress. Easy money from central banks has kept default rates relatively low since the 2008 financial crisis, but rising corporate debt is flashing a warning sign to investors, Morgan Stanley bond analysts said in a report published Nov. 19.
The private equity industry came under the microscope — and, at times, under attack — yesterday at a House Financial Services Committee hearing on private equity practices, Pensions & Investments reported. Some possible actions discussed at the hearing were several legislative proposals, including H.R. 3848, the "Stop Wall Street Looting Act of 2019," that would require private equity funds to share debt liability, prohibit capital distributions for two years after buyouts, create new marketing disclosure regulations, among other measures, a companion to legislation introduced by Sen. Elizabeth Warren (D-Mass). Other legislative proposals on the drawing board include one calling for board composition disclosure by private equity firms and the proposed Investment Adviser Alignment Act, which would require SEC reporting on fees and expenses, impose a fiduciary duty on private equity funds and allow communication among limited partners. Wayne Moore, trustee of the $58.4 billion Los Angeles County Employee Retirement Association, Pasadena, Calif., testified that more disclosure of private equity fees and expenses will help public pension fund investors. "My fiduciary duties include making sure we get what we pay for," he said. "Private equity is one of our best performing assets, but it is also our most costly asset," he told the committee, adding later that "information is critical, and we lack the information we need." A committee memo noted that state legislatures in California, Washington and Virginia have passed laws requiring public disclosure of information about private fund fees and expenses. Read more.
To watch a replay of the hearing and to read prepared testimony, please click here.
The U.S. housing finance regulator yesterday said that it planned to re-issue new capital rules for mortgage giants Fannie Mae and Freddie Mac next year, in a development that is likely to slow the pair’s removal from government control, Reuters reported. The Federal Housing Finance Agency (FHFA) said that it would again propose the rule first unveiled in July 2018 in light of the administration’s decision to begin rebuilding the mortgage giants’ capital bases as part of a broader plan to ultimately remove them from government conservatorship. The decision means the proposed rule may be changed and would have to be submitted to another round of consultation and public feedback, before being finalized. The entire process could take several months. “In fairness to all interested parties, the comments submitted during the previous rulemaking were submitted under a different set of assumptions about the future of the enterprises,” said FHFA director Mark Calabria in a statement. Fannie and Freddie, which guarantee over half the nation’s mortgages, have been in conservatorship since they were bailed out during the 2008 financial crisis, with their earnings being swept into the Treasury’s coffers. The government has since struggled to agree on a plan to get them back on their feet.
Among five financial services bills passed by the House of Representatives yesterday was the "Investor Protection and Capital Markets Fairness Act" (H.R. 4344) that would substantially strengthen the authority of the Securities and Exchange Commission (SEC) to recover the wrongful gains of securities law violators for investors, Investment News reported. The bill was introduced by Rep. Ben McAdams (D-Utah) and passed by a vote of 314-95. A recent Supreme Court decision, Kokesh v. SEC, capped the SEC's look back at five years. The bipartisan Investor Protection and Capital Markets Fairness Act would apply a 14-year statute of limitations for the SEC to seek so-called disgorgement, or the return of ill-gotten gains. The House legislation also would prevent disgorgement from being defined as "a civil fine, penalty or forfeiture." Defining it in one of those categories would limit the timeframe and monetary amount of disgorgement. Read more.
Click here to read the full bill text.
A former trader at the defunct hedge fund Premium Point Investments was ordered to spend almost 3 1/2 years in prison for conspiring with the firm’s co-founder to overvalue its assets in order to attract new investors and keep clients from leaving, Bloomberg News reported. A federal judge handed down the 40-month sentence against Jeremy Shor, who was convicted by a jury in July of fraudulently “mismarking” the value of fund holdings. Prosecutors said that Premium Point co-founder Anilesh “Neil” Ahuja, who was also found guilty in July and faces sentencing next week, and portfolio manager Amin Majidi set inflated monthly targets for returns then ordered Shor and other traders to manipulate the valuations accordingly. Prosecutors had asked the judge to sentence Shor to “a substantial period” behind bars, saying he played an “instrumental role” in inflating the fund’s assets. Court probation officials had recommended a term of three years. Addressing U.S. District Judge Katherine Polk Failla before his sentencing in Manhattan federal court yesterday, Shor said that he should have raised questions about the valuations of the firm’s assets.
