Unraveling the Impact of Private Equity on FCPA Compliance in Portfolio Companies
November 15, 2023
Private equity (PE) has become a subject of concern due to its vast scale, according to an article on the FCPA Blog, PE firms held $6.3 trillion in assets and $2 trillion in uninvested cash as of 2021. The sheer number of PE firms globally, managing assets in 40,000 portfolio companies, has led to a decline in the number of public companies listed on U.S. stock exchanges. While some argue that the biggest PE firms, such as Blackstone and KKR, are publicly traded and subject to SEC disclosure requirements, suspicions persist that the industry’s opacity allows for corporate wrongdoing and economic instability.
When it comes to complying with the Foreign Corrupt Practices Act (FCPA), one of the main concerns is whether private equity (PE) firms, which typically take a long-term approach, hinder portfolio companies’ compliance efforts. About 28% of companies currently under investigation for FCPA violations are either controlled or greatly influenced by PE firms, which shows the industry’s impact on corporate equity. However, an analysis of the data indicates that companies under PE control do not perform significantly worse in FCPA compliance than their peers.
Proponents of PE argue that portfolio companies, operating on a longer time horizon, can focus on compliance without the pressures of quarterly earnings calls. Yet, structural problems arise during post-investment growth, especially when companies expand into new markets. Compliance departments at smaller portfolio companies are often undersized, creating a disconnect between business expansion and compliance readiness.
The dilemma facing PE is striking a balance between promoting growth and maintaining compliance. While compliance issues can harm reputations and financial performance, compliance professionals are expensive, and overly ambitious programs may hinder the agility of smaller portfolio companies. The question remains as to how PE can navigate this dilemma effectively.
The Securities and Exchange Commission (SEC) is increasing disclosure requirements for PE firms, aiming to provide investors with more information. The impact of these new rules on compliance at portfolio companies is uncertain, leaving the question of how private equity influences compliance in need of further exploration.
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