Scott Sperling, co-president of private-equity firm Thomas H. Lee Partners LP, said new financial regulations are hurting the U.S. economy and increasing costs at Wall Street banks and asset managers.
Sperling, who leads the Boston-based firm with Anthony DiNovi, said that while the regulations do well by reducing leverage in the financial system, there are some unintended consequences. By restricting banks from proprietary trading, the proposed Volcker rule would limit lenders’ ability to provide liquidity to financial markets, he said.
“There are significant challenges from the Volcker rule and Dodd-Frank that actually cause them to do things that increase the risk of what they’re doing,” Sperling said today in an interview with Bloomberg Television’s Cristina Alesci. “Therefore they have to pull back from some of the activities that can be very helpful to the markets.”
A longtime Democrat, Sperling, 54, said he supports Republican Mitt Romney against Barack Obama in the U.S. presidential contest. Romney, a co-founder and former chief executive officer of Boston-based Bain Capital LLC, has attracted negative attention for the private-equity industry from opponents who say buyout managers enrich themselves at the cost of companies and workers and benefit from preferential tax treatment.
Obama and other Democrats have backed proposals to raise taxes on investment performance fees, known as carried interest, that private-equity managers receive. During the campaign, Romney has yet to say definitively whether he favors treating the earnings as capital gains, as they are now, or as higher- taxed income.
Washington’s ‘Punching Bag’
“The political environment is not going to get better through November, it’s going to get worse,” Sperling said. “Yet I think Mitt has an incredible skill set for the challenges that we have in front of us.”
The March 14 New York Times op-ed piece by Greg Smith, the former Goldman Sachs Group Inc. (GS) derivatives salesman, is another “flashpoint of criticism” that may affect morale at Wall Street banks, Sperling said. In the piece, Smith blamed CEO Lloyd Blankfein and President Gary Cohn for fostering a “toxic and destructive” environment.
“In an environment where they’re getting punished in the press almost daily and have become the punching bag for many folks in Washington, it makes it a less enjoyable environment to be in,” Sperling said.
Goldman Sachs lost $2.15 billion of its market value the day the op-ed was published. Paul Volcker, the formal Federal Reserve chairman who originally proposed the Volcker rule, called Smith’s article “a radical, strong” piece.
U.S. Retail Growth
THL has made investments valued at more than $150 billion in aggregate since its founding in 1974. The firm, which manages $14 billion in assets, has stakes in companies including Dunkin’ Brands Inc. (DNKN), Clear Channel Communications Inc. and Nielsen Holdings NV (NLSN).
As private-equity managers are hitting the road this year to raise new capital, Sperling said he expects fund sizes to shrink. Fundraising slowed in the third quarter last year to the weakest pace since before the global financial crisis and stayed near that level in the final three months of the year, according to London-based researcher Preqin Ltd.
“I think that we have to be prepared for smaller fund sizes,” Sperling said. “The fund size should be smaller because the nature of the deals that are being done will be smaller.”
Sperling said he expects more deals in the U.S. retail industry, attracting private-equity investors. As the economy improves, so will consumer markets including retail and health care, he said.
“Macroeconomic uncertainty is becoming less of an issue,” Sperling said. “People are getting comfortable that the consumer is going to be there, and going to be growing in the U.S. market.”
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