PE caught in global trade crossfire
Private equity investments in the US could face regulatory scrutiny and a potential presidential block if foreign LP backers of a fund are deemed a risk to national security. US president Donald Trump signed this week a legislative overhaul to empower the Committee on Foreign Investment in the United States (CFIUS), an inter-agency body created in 1988 to screen foreign investments on behalf of the president. The CFIUS was already able to review transactions granting foreign parties control or access to strategic US assets. Under the reform, it will be allowed to probe changes in the rights held by foreign organisations which are invested, directly or otherwise, in critical US business sectors. Some exceptions will apply to funds “exclusively managed” by a US GP or where LPs cannot influence decisions on investment, hires or pay. In the months leading up to this week’s signing, private equity has been repeatedly urged to look into its potential exposure to a CFIUS probe. GPs, lawyers have said, should “carefully examine” the use of offshore funds and the level of foreign LP ownership, even in “clearly non-controlling” scenarios. [infogram id="_/FoTKgFPdyQPJRqgVDFRF" prefix="znC" format="interactive" title="FCIUS"] The bipartisan reform, first proposed in 2017 as part of a broader US defence review, is not expected to become fully applicable for a few months still. CFIUS must still flesh out some of the key definitions, including what constitutes a “substantial interest” of a foreign person or government and a “critical technology”. The new US legislation, linked in some quarters to a protectionist agenda, was negotiated as trade war raged between the country and China. The text signed into law by president Trump – who was elected on a “America First” platform – singles out the Asian superpower, requiring the collection of data every two years on the country’s investments in the US economy. Even before its powers were reinforced this week, CFIUS was thought to already be “closely scrutinising” the national security implications of PE deals in the US. Late last year, Chinese group Canyon Bridge was blocked by Trump’s administration from buying chip-maker Lattice Semiconductor – its separate plans to buy British business Imagination were given the all-clear by the UK government just a week later, however. Trade wars between the world’s major economies remain one of several geopolitical fronts private equity must contend with. From Brexit to the rise of populist parties and the reputational risks of tax arrangements, The Drawdown is preparing an investigation into how well-equipped the industry is to deal with political disruption.