PRIVATE EQUITY executives have been left scratching their heads over what Barack Obama’s crackdown on banks means for their industry.
Many private equity bosses think they could benefit as much as they lose out. As well as proposing a ban on proprietary trading, Mr Obama said banks would no longer be allowed to own, invest in or sponsor hedge funds or private equity funds.
There are two ways that Mr Obama’s plan is expected to affect the private equity industry. First, it could stop banks from investing in other private equity funds. Second, it could stop banks from running their own captive private equity arms. The first impact could be a blow to private equity fund-raising, which has already fallen heavily, as US banks accounted for 9 per cent of all the capital being managed by private equity groups in the US last year.
However, banks have already cut back heavily on their private equity investments because of regulatory and accounting pressures, says Andrew Sealey of Campbell Lutyens. “Even without this, many banks would be significantly reducing their investments in private equity or, in some cases, selling it off entirely,” he said.
The second impact mainly concerns the captive private equity arms of US banks, of which the biggest by far is Goldman Sachs Principal Investment Area. According to Goldman’s accounts, it has $14.1 billion of private equity and merchant banking assets on its balance sheet, which are part of a total $145 billion portfolio of alternative assets, including hedge funds, private equity and real estate.
The private equity firms have always had a love-hate relationship with Goldman Sachs, whose private equity operation has been the only arm of any Wall Street bank to pose a significant challenge to them.
The planned reform raises many questions for the banks. The money that they have invested in their captive buy-out funds is a highly illiquid asset that is usually only fully repaid after at least 10 years and is hard to sell, except at a big discount. – (Copyright The Financial Times Limited 2010)
