President Obama has proposed a number of reforms to America’s financial regulations, changes that many argue are necessary to prevent another economic meltdown. But the measure could hold some unintended consequences for telecom, by perhaps limiting access to venture capital.
You see, one of the revisions would order hedge funds and other private capital investors to register with the Securities and Exchange Commission. That would mean complying with record-keeping rules; providing disclosures to investors, creditors and other parties; and sharing (confidentially) assets under management, any borrowing, off-balance sheet exposure and “other information necessary to assess whether the fund or fund family ... poses a threat to financial stability,” according to the draft law.
On the surface, none of these requirements impacts telecom all that much, insiders say. In fact, hedge funds – those high-risk investments that pushed Wall Street over the edge in 2007 – need a more watchful eye, they say. Dig a little deeper, though, and the potential for negative effects on telecom comes to light.
For one, CLEC access to large pools of capital could diminish because of fewer leveraged funds in the hedge fund world, said Rich Buchanan. He’s chief marketing officer of Ooma, the Silicon Valley startup that recently raised $18 million in what it said is its final round of venture financing before it turns profitable. Securing that kind of money in a recession makes Ooma a bit of an expert on the system in tough times. To that end, “more conventional financing will be required for the highly capital-intensive buildouts some vendors may have planned,” Buchanan said.
NuVox Inc. is another one of the many CLECs that relies on venture capitalists and other private investors to back its growth. And CEO Jim Akerhielm is less concerned about access to funds than he is about the proposed regulation’s influence on the industry’s private equity firms.
“There may be some disclosure obligations ... that may be onerous, so that might be an administrative burden to private equity, but it wouldn’t concern me,” he said.
But things could get ugly if the reporting standards grew so onerous that they became “a significant cost and distraction” to funders, Akerhielm said. “That doesn’t encourage the creation of new private equity firms,” he said. “One could argue it could encourage consolidation.”
Another downside would manifest if NuVox and its privately held peers had to share more than revenue and balance sheet standing, which is generic financial information, Akerhielm added.
“I’m okay with that. But if I had to start talking about who our largest customers were, and customer-specific things, that would make me edgy.”
