US, European Legislation Prompts Banks to Reshuffle PE Branches

(August 16, 2011) — Legislation in Europe and the United States is fueling a number of major changes within the Private Equity divisions of banks worldwide, Preqin has found.

According to the research group, the private equity arms of many global banks are being restructured, or spun out, as they aim to comply with the Volcker Rule in the US and European legislation Basel III.

“The financial crisis and recent changes to legislation have had a lasting impact on banks’ activity in the private equity asset class, with the amount of capital committed to the asset class falling over the past few years,” said Preqin spokeswoman Helen Kenyon in a release. “We have seen a number of approaches taken by banks to their captive private equity operations and it is clear that there are further changes to come,” she said, noting that it is likely that banks will continue to remain a significant and important part of the private equity investment universe. However, strengthening capital requirements and the restrictions on private equity investments will force more banks to alter their investment strategies, while compelling private equity firms to seek capital elsewhere, she asserted.

Preqin’s research revealed that banks have always been major players in the private equity investing space — currently, private equity arms of banks hold $49.7 billion of un-invested capital, or 5.4% of aggregate global dry powder. Furthermore, Preqin’s research demonstrated that banks accounted for 9% of all capital invested in private equity as of 2010, equating to an aggregate $105 billion — a number that was slightly less than the $115 billion invested as of 2008.

Last month, Preqin ‘s private equity research found that management fees are still causing significant unrest amongst investors. “In the difficult fundraising market, negotiating favorable fund terms and conditions is of the upmost importance to investors. That such a large proportion of limited partners will not consider investing in a fund that does not conform to the ILPA Principles is clear evidence of this,” stated Preqin’s Kenyon.

Preqin’s survey found that 50% of limited partners feel that there is a misalignment of interests between themselves and fund managers when it comes to management fees.