The Obama administration's proposal banning U.S. banks from owning, investing in or sponsoring hedge funds and private equity forces the banks to spin off their fund management businesses, which could be “extremely disruptive” to both industries, according to alternative investment research firm Preqin.
“People in the (private equity and hedge fund industries) are concerned,” London-based Preqin spokesman Tim Friedman said in an interview, noting it could affect hundreds of institutions.
He said it could affect foreign markets as well, with U.S. banks investing in European and Asian funds. “The effects could be far-reaching. Private equity is very much a global industry,” Mr. Friedman said.
It's not clear whether banks could bypass the ban by claiming that such investments are part of serving their customers, he added.
A statement released Jan. 22 by Preqin notes that U.S. banking institutions — particularly, Goldman Sachs Group Inc., Credit Suisse Group, Morgan Stanley and Citigroup Inc. — have raised more than 60 private equity funds and funds of funds since 2006, worth more than $80 billion. U.S. banks also have 18 private equity funds seeking a total of $18 billion in funding.
Preqin estimates that banks have $50 billion in private equity capital available for new investments.
Also, according to Preqin, U.S. banks contribute about 9% of the capital invested in private equity.
“In addition, there are 16 banks with fund-of-funds divisions currently managing private equity investments worth $94 billion,” according to the Preqin statement. “Hundreds of limited partners in funds of funds managed by U.S. banking institutions could also be affected by the proposal.”
U.S. banks' direct investments account for about 0.9% — roughly $10 billion — of the total capital coming from U.S. investors in hedge funds. The 19 hedge fund units of major U.S. banks monitored by Preqin represent a total of about $180 billion in assets, about 16% of total U.S. capital in hedge funds. Large U.S. banks in hedge funds are Goldman Sachs, Bank of New York Mellon Corp., Credit Suisse and J.P. Morgan Chase & Co.
“Restrictions on banks from managing such funds of funds will not only significantly impact the hundreds of hedge funds (both U.S.-based and international) which are backed by these fund-of-funds subsidiaries of U.S. banks, but also the hundreds of institutional investors (such as U.S. public pension funds, endowments and insurance companies) which have their assets invested in such funds,” according to the statement.