As the Dow hits another record high, we return to the debate about the impact of SOX on US equity markets. Many have contended that SOX has made the US less competitive. Such was the position recently taken by Jon Macey at Yale. For a discussion of that position, go here.

As did Stephen Schwarzman, the chairman, CEO and founder of the Blackstone Group,  Blackstone describes itself as “a leader in the field of private equity investing since 1987, managing $28 billion”  with Schwarzman having been described as the “king of private equity”

Schwarzman has not been a fan of SOX (calling it a “terrible thing” for the US), or the public securities markets in general, decrying the “tyranny of quarterly earnings”. So why then is this scion of private equity planning to bring Blackstone Group public, subjecting the company to the terrible thing of SOX and the very tyranny that he has criticized? Or, as the Deal Journal Blog for the WSJ asked, could this be “the most unlikely conversion since Saul of Tarsus fell off his horse en route to" Damascus?

One reason is likely the “multimillion-dollar paydays for the co-founder of the firm, Steve Schwarzman, and his partners.” But you can only have a payday if people will buy your shares at the requisite price. In fact, while all of the criticism of SOX has gone on, investors have become remarkably confident in the stock markets, something that was not true in the immediate aftermath of Enron and Worldcom.  They are back buying shares in tech companies that are "in the red," a phenomena reminiscent of the dot.com boom.  

Why should they be more confident? For one thing, the financial disclosure is better.  While restatements since the adoption of SOX have been rampant, suggesting a major period of error correction (the Commission staff have noted that many are a result of “flat out errors”), the nature of the companies restating their earnings has changed. As larger public companies have had more experience with SOX, the number of their restatements has fallen. The growth, therefore, is among smaller companies, the ones that are only now grappling with the need to have workable internal controls that generate accurate financial statements.  With confidence in larger companies, it is the Dow that is hitting record highs. 

There are no doubt other reasons, however, for the Blackstone Group's new found interest in public equity.  Private equity and debt often come with strings attached.  The purveyors of this type of capital can usually exercise some degree of oversight of management.  In other words, they want accountability.  Public shareholders have almost no mechanism for ensuring accountability.  They have little opportunity to unseat board members or influence decisions with respect to management.  State law imposes few meaningful standards.  It is likely the case, therefore, that the Blackstone Group wants public equity because of the lack of accountability attached to the funding. 

Finally, this Blog would like to let everyone in on a little secret.  While private equity funds may criticize SOX (why not, the criticism effectively encourages companies to consider leaving the public markets, a benefit for private equity funds), they actually like it.  Talk to anyone in the private equity realm and ask them if they would be more or less inclined to buy a firm that has internal controls and financial reporting that are SOX compliant.  The Blog can predict the answer.