President Barack Obama’s plan to limit financial risk-taking could force banks, such as Goldman Sachs or JPMorgan, to shed parts of their private equity operations.
Among the proposals, which require congressional approval, is that banks or financial institutions that own banks would not be able to own, invest in or sponsor private equity funds unrelated to serving customers.
A number of banks have sizeable private equity interests, for example, JPMorgan’s One Equity Partners, manages $8 billion of investments and commitments for the bank, while Goldman Sachs has a vast private equity business, and invests its own capital in its funds.
JPM and Goldman declined comment.
Still, banks would likely argue that those businesses are in customers’ interests, observers say. For example, the bulk of Goldman’s private equity is invested for clients.
“It is a moderate impact on private equity,” said Steven Kaplan, a professor of finance at the University of Chicago. “Most of the money going in comes from clients rather than from the capital of the bank, or the employees.”
The proposal could also impact fundraising by private equity firms, although banks only account for a small percentage of invested capital in funds.
Banks and investment banks account for around 9 percent of invested capital in private equity funds in the US, London-based research firm Preqin estimates. Preqin counts 102 US banks and investment banks in its database investing in private equity, although says it is doubtful that the proposals would apply to all of those.
“Banks in both North America and Europe have been exiting private equity for several years, and it will be much faster paced over the next 2-3 years,” said David de Weese, partner at specialist secondary firm Paul Capital, although he said that it wouldn’t be because of Obama’s proposals.
“Most big money-center banks got into private equity as limited partners and/or co-investors alongside leveraged buyout funds to support their highly profitable leveraged lending business,” he said. However, that need has declined as the number and size of LBO deals has shrunk.
There is also skepticism about whether the proposals would become bank regulatory law.
“It’s an opening salvo,” said one private equity executive who declined to be named. “It is not something that will happen next week and (the details) are so vague.”