Foreign LPs face scrutiny under bipartisan reforms sought by Cornyn, Pittenger

Private equity’s lobbying arm is directing its attention toward a new bill that could complicate PE deals led by firms backed with foreign cash.

The proposed bill would expand the scope of the Committee on Foreign Investment in the United States review process to include non-controlling investments made by foreign entities.

The committee, which includes nine cabinet members, two ex-officio members and other presidential appointees, has the authority to block foreign investments in U.S. companies.

Under the current rules, the committee reviews only deals in which a foreign investor takes control of a U.S. company.

A broad interpretation of the reforms included in the bill could put co-investments or investments made by funds with foreign investors under the regulatory microscope, particularly if a deal involves technology or infrastructure deemed “critical” to U.S. interests.

In September, President Donald Trump used the committee to block a $1.3 billion deal led by Canyon Bridge Capital Partners to acquire Lattice Semiconductor. Canyon’s buyout fund was backed partly by cash originating from China’s central government, Reuters reported in 2016.

Versions of the bill have been introduced in the House of Representatives and Senate with bipartisan support.

“Our biggest key priority there is that as they update CFIUS, [they] don’t do unintended damage,” Jason Mulvehill, of lobbying group American Investment Council, said.

“I think there’s a sense that there was never an intention to develop a change to CFIUS that would affect or change passive foreign investment in private equity funds.”

Spokespeople for the bills’ sponsors, Sen. John Cornyn (R-Texas) and Rep. Robert Pittenger (R-North Carolina), did not respond to requests for comment.

U.S. private equity firms like Blackstone Group, Kohlberg Kravis Roberts and Warburg Pincus have bolstered their relationships with Asian LPs and dealmakers in recent years.

Blackstone Co-Founder Stephen Schwarzman, who’s supported Trump as both a fundraiser and adviser, has reportedly cautioned the administration against attacking China too aggressively.

Technology companies are increasingly turning to Asia’s venture capital market for funding, particularly with Japan’s SoftBank Group looking to deploy roughly $100 billion through its Vision Fund.

Chinese venture capitalists raised almost $24 billion last year, according to Thomson Reuters data. Venture firms based in China deployed roughly $4 billion in U.S. businesses.

Congress is considering updating CFIUS as Trump’s administration scrutinizes trade imbalances with foreign countries, particularly those in Asia. Trade is also reportedly at the top of the agenda for Trump’s meetings with Japanese Prime Minister Shinzo Abe this week.

China and the U.S. in recent months have sparred repeatedly over the implementation of tariffs that could drive up the costs of consumer goods.

The National Venture Capital Association also weighed in on the bill. NVCA Board Chair Scott Kupor, a managing partner of Andreessen Horowitz, testified in front of the Senate Banking Committee in January, arguing that the bill is ambiguous in its treatment of foreign venture-capital fund LPs.

“I think we’re actually probably aligned with the GP community, that if you have foreign LPs in a fund, that the foreign nature of those investors shouldn’t be imputed to the GPs in the fund,” said Chris Hayes, director of industry affairs at the Institutional Limited Partners Association, which represents LP interests on Capitol Hill.

“We support something a little more clarifying in the language. … It’s something we’re monitoring.”

ILPA’s priorities

Publicly, the Trump administration signaled its willingness to undo some of the regulations implemented under President Barack Obama. Hayes said, however, that it’s still too early to tell whether Trump’s deregulatory bent changed the way in which private equity firms are regulated.

While some PE observers suggested the SEC may be less aggressive under Trump, TPG recently settled an enforcement action alleging that the firm had failed to disclose accelerated monitoring fees to its investors. TPG agreed to pay $12.8 million and did not admit or deny wrongdoing.

“We’re obviously monitoring that quite closely. We think enforcement actions discourage bad behavior,” Hayes said. “It helps to have the stick with the carrot.”

ILPA members have met with the SEC and Senate Banking Committee staff to emphasize the effect regulation has had in getting PE firms to disclose more information about the fees and expenses charged through their investment funds.

In 2016, ILPA lobbied against the Investment Advisers Modernization Act, which would have eliminated some of the disclosures fund managers were required to make to their LPs. The House approved the bill, but it never gained traction in the Senate.

“Ultimately our investors bear the compliance costs of these managers, and they’re happy to do that,” Hayes said, adding that while there is some room for easing certain regulatory burdens, “we’re in favor of the SEC determining what they need as opposed to Congress.”

Action Item: For more on the American Investment Council, visit www.investmentcouncil.org/

U.S. Sen. John Cornyn (R-Texas) speaks to reporters outside the Senate chamber on Capitol Hill in Washington on Feb. 7, 2018. REUTERS/Eric Thayer