On 12 October, the Federal Deposit Insurance Corporation and the Federal Reserve requested public comment on restrictions in the Dodd-Frank Act that would ban banks from owning or sponsoring private equity funds. The trouble is, sources say, many private equity players are still not sure what to make of the regulations.
“Calling it a mess wouldn’t be far-fetched,” says Triago general counsel Cédric Teissier. “Reading through the rules, you realize the huge amount of intricacies that still need to be fleshed out. There are just so many principles and exemptions that clarifying the intent and rationale behind some of them is not an easy task. A good proportion of the relevant players, whether US or non-US, will need to think hard as to whether and how they can invest in a fund, be a trustee or be a board member. It’s really hard to see how it’s going to play out.”
Nevertheless, the Volcker rule is also impossible for banks to ignore. In their current form, the proposed regulations would severely limit banks’ ability to offer private equity funds. They would also have to limit their investments in new funds to no more than 3 percent of their Tier 1 capital, and would be prohibited from acquiring more than a 3 percent stake in any particular one.
Once the new regulations are implemented in 2012, firms will have two years to unwind their current private equity positions, and can apply for three one-year exemptions following that period. Illiquid assets held prior to the rule’s implementation can be retained for up to five years, pending Federal Reserve Board approval.
“There is no easy way around the Volcker rule. So yes, [the banks] are going to have to decrease their private equity holdings,” says Mayer Brown partner Philip Brandes.
According to Teissier, the banks he has spoken to have stopped making new commitments to private equity funds, and are expected to offer their remaining assets on the secondary market in the next few years.
Of course, that should be good news for secondaries buyers. They’ve already seen their market receive a substantial boost from the announcement of the Volcker rule, and you’d expect, many are already preparing for the day when the rest of these portfolios go on sale. The trouble is, it’s still not clear when that day will be.