Secondaries firms are watching to see if activity picks up after 18 October, the date when regulators must finalise implementation rules for provisions in the US financial reform law that severely restricts financial institutions’ private equity operations.
Sources in the secondaries market told Private Equity International they don’t expect the passing of the deadline to be a huge driver of activity, though seeing the final version of the rules in “black and white” could push some institutions to sell immediately.
“[The deadline] could drive banks to get their private equity out right away. They’ll look at the rules and say, ‘there’s not a lot of wiggle room here and given that, sooner or later we’ll need to get out, let’s get out now and try to get the best price we can in terms of our investments’,” said Kevin Petrasic, a partner in law firm Paul Hastings global banking practice.
“Other folks may take full advantage of the conformist period and figure out when is the best time for them to divest their holdings, recognising they still have … extensions,” Petrasic said. In fact, some institutions may make full use of the available extensions and hope the Dodd-Frank law gets weakened over time, he said.
With all the available extensions, financial institutions could have until as far out as 2022 to become fully compliant with the portion of the Dodd-Frank Act that deals with bank-owned private equity, known as the Volcker rule. “If we assume a bank gets approval for all possible extensions, it could technically keep its private equity portfolio as is for many years and merely halt private equity commitments,” said Cédric Teissier, in-house counsel and partner at placement agent and secondaries advisor Triago.
[The deadline] could drive banks to get their private equity out right away.
Some financial institutions have already started the process of divesting their private equity assets and operations. Citi has hit the secondaries market several times with billions of dollars-worth of private equity assets, and Bank of America has spun off most of its private equity operations.
However, other institutions have been watching and waiting and haven’t yet made moves to deal with their private equity holdings, sources said.
One professional at a global secondaries firm said in a recent interview activity would pick up after the October deadline and the firm is preparing to review the assets that come to market. Other secondary market sources were not so sure the October deadline would signal an uptick in deals.
“We’re not convinced  October is some sort of magic day when everything starts coming to market,” according to a source at a major global secondaries firm.
Even if the October deadline doesn’t lead to increased deals, institutions will not likely take advantage of all the
If we assume a bank gets approval for all possible extensions, it could technically keep its private equity portfolio as is for many years and merely halt private equity commitments.
extensions available, the source said. “Most of these institutions aren’t going to wait until the end of [the extension period] any way. The people managing these assets are going to say, ‘why am I sitting here just winding down a business’?” the source said.
Even if the October deadline doesn’t lead to a flood of sales, activity is expected to increase in the last months of the year and into next year, sources said.
Activity will increase because of several factors, including the October deadline, but also because of current pricing levels, which have risen over time to favour sellers and “balance sheet pruning ahead of Basel III”, according to Traigo’s Teissier. Basel III’s rules on bank capital adequacy are scheduled for implementation in early 2013 and will make it more expensive for banks to hold private equity assets, Teissier said.
“Given these catalysts, you can expect a steady increase in secondary volume over the next 12 to 18 months, but there is no apparent reason to expect an explosion in sales, driven by the Volcker rule or other factors,” Teissier said.