Can someone please explain to me how investment banks still have private equity and merchant banking groups post-Volcker Rule? My (laymans) understanding is that these kinds of activities were either banned or severely limited with the Volker Rule.
If banned, what happened to the existing groups? If they skirted around the rules, what did they do to continue to exist? I find this pretty interesting but can't find much history about it online.
Bonus points to anyone that has worked in one of these groups and can share how the rule impacts their day-to-day, competitiveness vs. other firms, etc. Can you only co-invest?
Thanks!
Curious about this too, I know a lot of the major banks spun off their PE divisions in the US and just retained some sort of ownership if any. But GS seems to have multiple ways they do balance sheet PE investing.
Which are?
I believe a merchant bank goes out and raises its own fund to co-invest with clients when they see an opportunity. They aren't using customer deposits to make investments.
Most groups in major banks raise and invest almost exclusively third party capital. There is a limit to how much employee and bank money can be in the funds (I believe 3%), which is a typical GP commitment in any case.
Agree with the responses so far.
The Volcker Rule, as part of Dodd-Frank, aimed to restrict banks from taking excessive risk from things outside their core business. This meant proprietary trading, hedge funds, private funds, and all sorts of investment related businesses that made the bank the principal (vs an advisory or intermediary) were put on the hot list to be sold, liquidated, or dramatically reduced in size. In order to avoid scrutiny, many banks chose to comply with the ruling that did not get implemented until 3-4 years after Dodd-Frank. Others waited around to see what the final rules were before making a decision. By the time the final rules were drafted for the Volcker Rule (including things like the limit to illiquid assets managed relative to tier 1 capital on the balance sheet), banks kept pushing for extensions to the deadline. Successful to date, as the deadline to comply is now sometime in the 2020s. The bank hope the additional time would: 1) give lawmakers time to reconsider the Volcker rule, and 2) buy more time to find ways to skirt around the current rules. As of today, it seems like this strategy has paid off in both ways (no surprise!).
I think it’s important to note the Volcker Rule was crafted at a time in American history when Wall Street hatred and bank scrutiny was at a high.
Additionally, Goldman, Morgan Stanley, and JP Morgan have the biggest to lose with the Volcker Rule and aren’t about to let go of their more profitable businesses without a fight. This means they’ve been most active in coming up with possible work-arounds. One is a syndication strategize where instead of pooling capital into a single fund, different vehicles would put in capital in the project or investment. Structurally more complex then today’s private equity legal web of LLCs, blocker vehicles, and the like.
Goldman, in particular, is making efforts to raise its Tier 1 capital through its retail banking unit (Marcus). You’re also seeing more capital coming into these funds from non-traditional LPs that the banks also have relationships with as clients in its other businesses (i.e. FOs, HNW).
Just speaking anecdotally, as I’ve never worked for one of these groups myself, the experience sort of varies across the different banks and even the groups within the same bank (i.e. CCMP and One Equity). A common complaint was deals were killed or brought in specifically because of pressure from the top. This meant doing deals you didn’t want to do or trying to get a deal across the finish line that you’ve been developing for few years, only to have it squashed because one of the bank’s C-suite executives didn’t like it.
Not sure what you mean with your last question on co-invest.
https://www.bloomberg.com/opinion/articles/2015-01-22/goldman-sachs-act…
https://www.cnbc.com/id/100519984
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