Private equity is not the target of Barack Obama’s proposals to restructure Wall Street. But for an industry that only tangentially gained from the bail-out, the effects could reach far. On the face of it, the implications of the “Volcker rule” don’t seem too serious. US banks, which represent about 9 per cent of all US private equity investments, according to Preqin, a consultancy, will no longer be able to make such investments with their own money.
In the round, this is a relatively small problem for JPMorgan and Goldman Sachs. Although they operate two of the banking industry’s biggest funds, these are not central to their core business. The wider industry may also welcome the changes. If a bank’s private equity arm is forcibly detached from the mothership, it will no longer get first look at deals the investment bank is working on. Smaller fund managers will welcome the level playing field.
There may be unintended consequences, however. Bank loans used to fund private equity deals are usually secured against the target company. Should it go bust, the bank could, in theory, be stopped from converting its debt into equity and becoming a de facto private equity fund. The result would be an asset firesale or bankruptcy instead. To compensate for this risk, the cost of lending for private equity transactions would necessarily rise.
Then there is the possibility that similar measures might be adopted across the Atlantic. Shadow chancellor George Osborne seems to like the US approach, and his opposition Conservative party is favoured to win elections this year. Barclays already plans to spin-off the remaining quarter of its €2.4bn private equity fund held on-balance sheet. Lloyds Banking Group, however, holds investments worth over £2bn. Yet another problem for the state-controlled bank.
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