Another twist on why private equity may go public

Is it time for private equity to go public? Many firms are asking themselves this question, as a recent Wall Street Journal article discussed.

Although the article doesn’t mention this, the SEC itself might be inducing this trend. In a previous posting, I discussed how the regulatory agency has set a February 1, 2006 deadline for hedge funds to consider how many investors they have. This is an attempt to close loopholes that regulators fear may open smaller investors – or merely those who are risk averse – from succumbing to the tempting returns provided by some hedge funds (especially when compared to weak mutual fund returns, and unreliable equities).

This regulatory action has spooked the private equity world as they worry that the hedge fund rules will eventually be applied to them. One way to control the outcome is to preempt the SEC by going public. This would impose new burdens on private equity funds and fund managers (greater disclosure, limited risk taking), but it at least it prevents the SEC from developing more stringent rules.

What’s more, the self-regulatory organizations (the stock exchanges) may be open to negotiation with private equity funds that decide to go public. These are not typical equities, and therefore the SRO’s may see fit to grant certain exemptions. Ultimately, the SEC signs off on the regulatory policies of the SRO’s, but it’s never showed a strong hand in rejecting proposals. Why should anyone worry that it would start in this case?