The securities regulator seems to be everywhere these days — in Congress and trying to deal with the revolt against Sarbanes-Oxley. And it’s not totally formulated its new regulations to ease the burden but one part of the package was revealed Monday when Commissioner Roel Campos said small caps will get another year before they have to comply with the tough audit provisions, reports Bloomberg.
The rule looks set to be approved next week along with the new guidance for auditors and specific compliance guidelines for management. The thought seems to be to let those with less than $75 million time to watch the big boys figure it out next year, so they’ll know what to do. But the advisory group under the informal aegis of Treasury Secretary Henry Paulsen suggested that some 80 percent of companies (those valued at $787 million or less) should be exempt.
And meanwhile back on Capitol Hill, BusinessWeek reports that the Pequot inquiry which is ostensibly about hedge funds is really about how much debt can be used to finance takeover deal in the private equity industry. And it’s certainly become a major industry in the last few years. All the big deals — HCA, Harrah’s and lots of smaller ones like Station will get the bulk of their financing from debt.
The industry loves it because it can get a lot more deals done and put in only a relatively small amount of money to get control. The bankers love it because the deals inevitably involve industries with strong cash flow that will always pay on their loans. So what’s the downside.
The regulators think that too much debt might allow too few people to control way too many assets. But as the magazine points out default is well below historic averages. If the regulators set debt ceilings, it could freeze the whole PE business. The pension funds and other eager investors who have been throwing money at private equity firms will look for other investments because deals will be less profitable and companies too will find it harder to find buyers who will pay to the max. But the size of some of these deals has already put a crimp in available bank funds and at least one law suit, as Business Press reported, is charging that the PE outfits have rigged the market to minimize competitive bids for companies in play.
