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Banks Changing Private Equity Strategies

08/16/2011 | By Carisa Chappell

New legislative measures in the United States and Europe have forced banks to restructure their private equity divisions, according to research released Aug. 16 by alternative asset research firm Preqin.

In efforts to comply with the Volcker Rule in the U.S. and Basel III in Europe, Preqin found that the private equity portion of a number of global banks are being restructured or spun out. Both measures were introduced following the recent recession.

The Volcker Rule was instituted to minimize conflicts of interest between banks and their clients by separating their business practices. Basel III was also designed to improve regulation, supervision and risk management within the European banking sector.

As a result, Preqin said, banks in both the U.S. and Europe have spun off their entire private equity divisions as single entities. Meanwhile, others have taken a different approach, dividing their operations based on strategic or geographic focus.

While banks have been major investors in private equity, Helen Kenyon, Preqin's deputy head of research, said new restrictions will lead more banks to alter their investment strategies.

"The financial crisis and recent changes in 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," Kenyon said.

Banks' investments in private equity dipped slightly from 2008 to 2010. Preqin noted that banks accounted for 9 percent of all capital invested in private equity in 2010, which equated to an aggregate $105 billion. However, they had accounted for $115 billion in 2008.

Additionally, a number of banks have sold portfolios of private equity assets on the secondary market in recent months, according to Preqin. Kenyon said she expects more changes down the road.

"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.

In addition to banks restructuring their investment strategies, Kenyon added that new legislation may compel private equity firms to seek capital elsewhere.

Data from Preqin noted that there are currently 136 private equity operations belonging to 39 different banks. The 10 banks with the largest captive private equity operations have raised $207 billion and are sitting on $46.3 billion in reserves.