Be smart when setting new regulations for financial institutions
While policymakers in Washington are taking their time to carefully consider how to overhaul our financial regulatory system without stalling economic recovery, the Connecticut Legislature has pulled a quick draw on financial institutions that have made major contributions to the state economy.
A recent proposal calling for more stringent regulation of private investment partnerships has stalled in the Connecticut House of Representatives, but the debate about how to regulate them hasn’t. What Connecticut should not do is fire first and ask questions later.
Certainly there is more room for transparency in the operation of private pools of capital — but not all private pools of capital pose the same level of risk. Private equity investments, for example, are inherently less risky than other types of private investments, including hedge funds. Private equity’s investment horizon is measured in years, not months, days, or minutes. Private equity invests in companies, not complex securities such as derivatives or credit default swaps. And private equity’s limited partner investors cannot pull their capital on short notice. There is no possibility of a “run on the bank.”
As we consider the additional regulation of private capital, either by states or the federal government, we also must keep in mind one simple fact: Sustaining long-term growth that is not dependent on trillion-dollar federal deficits means that we must encourage — not curtail –
the kind of entrepreneurship and capital investment that has fueled the American economy for well over a century.
As a co-founder of a mid-size private equity firm here in Connecticut, I’ve seen firsthand how prudent equity investments in American businesses can build stronger companies, better employment opportunities and a thriving economy.
I also know that private equity investment can help drive our nation’s economic recovery. Private equity firms provide much-needed capital injections, as well as strategic thinking and management expertise to companies to help them become more productive, competitive and profitable. Stronger, more stable companies in turn create jobs, increase R&D and make other capital investments that resonate throughout the economy.
This multiplier effect underscores the importance of incentivizing private capital investment in every industry and sector and at all levels of the economy. Building stronger, more competitive companies — whether it’s a local manufacturer that anchors the town, a statewide retail chain or a global software developer — is the single best solution for reversing America’s economic decline. It’s also the idea on which the private equity investment model is based.
When most people think of private equity firms, they envision financial behemoths based in New York City or San Francisco. But players in the industry come in all shapes and sizes and the companies they invest in span every industry and region. Across the country, there are more than 1,400 private equity partnerships. Only a handful are financial Goliaths, yet all of us make investments that benefit the American economy.
Today, there are 87 companies operating in Connecticut that are owned or backed by private equity investment, many of which are thriving and providing jobs to Connecticut’s communities. And private equity partnerships — including small and midsize firms — have invested nearly $5 billion in these businesses across the state.
There are hundreds of examples of private equity-backed companies across the country that are expanding their operations, increasing sales and bucking the lay-off trend that plagues many U.S. industries. My private equity firm, Altus Capital Partners, invests in small and midsized manufacturing companies. Today we have investments in seven companies. In 2009, our portfolio is forecasting — even in this down economy — total sales to exceed $600 million, and collective employment is expected to grow by 8 percent in 2009 to more than 2,100. Not every company backed by private equity investment is sure to succeed — private equity investment is not a silver bullet. But it’s a good example of the kind of investment America needs to kick-start its economy.
So, as members of the Connecticut Legislature continue to consider regulating private investment pools, let’s hope that their debate is informed by an understanding that more effective regulation and economic recovery are not mutually exclusive, but rather co-dependent. Efforts to increase transparency should not hinder private capital investment but rather support it. The sooner we see an uptick in private equity investment, the sooner we’ll see that capital being put to good use — strengthening companies, creating jobs and driving economic growth.