Concerns among US buy-out executives that their predominance could be challenged by the surge in sovereign wealth funds were “legitimate”, a senior US Treasury department official said on Wednesday.
David McCormick, the undersecretary for international affairs at the Treasury, testified at a congressional hearing that investment funds controlled by foreign governments could potentially “distort markets” by overpaying for assets in which they invest, therefore creating a perception of “unfair competition” with private firms.
David Rubenstein, co-founder of Carlyle, the private equity firm, told the Financial Times this week that it was “not preordained” that US firms would dominate private equity globally in the future because they would be challenged by the explosion of wealth in Asia and the Middle East.
Mr McCormick sought to assuage bipartisan lawmakers who are deeply suspicious of sovereign wealth investments into the US, by emphasising that the White House was equipped to investigate transactions that involved foreign state-controlled funds on national security grounds.
However, he acknowledged that it “remains to be seen” whether it would be sufficient for sovereign wealth funds to be regulated by voluntary standards. The Treasury has called on the International Monetary Fund and the World Bank to develop a checklist of best practice to ensure investments are transparent.
Evan Bayh, a Democratic senator, questioned the voluntary approach by highlighting Russia’s use of its energy wealth against its neighbours. “Their behaviour using energy can best be described as thuggish. When you have a country behaving like that, are voluntary standards enough?” he said.
The lawmaker also questioned how the US would deal with minority investments by foreign state-controlled entities.
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