I enjoy Conglomerate Blog. Particularly when entries like today's "Private Equity, Illinois Pensioners and Sudan?" make the page. New contributor Bobby Bartlett pens an interesting yarn about Illinois' attempts to prevent funds of all kinds from investing in the Sudan. The mechanism is to require from all pension funds over which Illinois has jurisdiction documentation that they have not invested in any vehicle (including hedge funds and private equity) that in turn invests in the Sudan. The pension funds are expected to obtain this certification from the vehicles themselves. The result is predictable and Bartlett summarizes it thus:
...private equity funds are already concerned with the additional disclosure burden of having public pension fund investors, and the Illinois legislation seems to be viewed by many private equity investors as simply one more reason to stay clear of “public” money.
Forgetting for a moment that such embargoes are probably most properly left to the Federal Government to enforce, and that Illinois means well, the entire situation is an interesting demonstration of the powerlessness of governments to influence large (or even medium sized) investment vehicles. Switching costs have become quite low and many funds have already fled the United States to avoid regulation. Soros is a famous and prolific user of offshore jurisdictions.
Financial disclosure is, of course, key. But I think the pendulum has swung too far. The United States risks being marginalized when it comes to alternative assets classes by jurisdictions like Luxembourg or the Islands. The United States is going to have to come to grips with the fact that burdensome disclosure will, first, press talent into private ventures, then if, as I suspect it will, the United States attempts to clamp down on those vehicles, those too will flee, taking with them their profits and tax revenue therefrom. Of course, I am a fan of private equity. There is a reason that it has become a highly preferred vehicle for high-risk, high-reward investment. There is a reason that the balance for talent and capital has tilted in the direction of firms like the one I work for.
It would be interesting to see what a survey of entering MBA students list as their primary motivation from coming to business school is. Then again, insofar as "interesting" means "surprising" it might be quite bland. Hedge funds and private equity would, I strongly suspect, feature highly. With all the whining about American educational competitiveness you'd think anything fostering the huge suction into United States' advanced degree programs would be a good thing.
We are actively shopping for our next vehicle. The United States isn't even in the cards, even though we plan to invest here (and perhaps even manage the fund out of Manhattan offices). And, of course, we don't touch "public money" either. With a track record you don't have to. There is enough sloshing around for everyone in the top quartile.
All of this might actually have an unintended effect. If the big "private equity bubble" exists and is about to pop, Illinois might weather it well. I doubt it, but we'll see.