With interest in stocks seemingly waning, a potential boost could be on the way-thanks to the U.S. Congress via financial regulation.
It is now a given that proprietary trading and derivatives activity are going to become a smaller part of financial firms balance sheets-effecting large investment banks and insurance companies. The benefiting outlet of such financial intermediaries could very well be their private equity businesses.
JP Morgan (JPM), for their 2009 fiscal year, reported about $80 billion in net derivatives receivables versus just $7.3 billion in private equity.
Goldman Sachs (GS) reports private equity as part of their $146 billion in alternative investments, and is probably no greater than 10% of that asset class.
Although a minority of the private equity assets of such firms are currently in publicly traded firms, that could easily change, given today’s low multiple valuations and the extended investor time horizon assumed in private equity deals.
To the extent such large financial firms are forced to curtail current lucrative areas as a result of new regulation and oversight, the beneficiary could very well be an increase in private equity and M&A activity, the result of which would be a positive turn in investor confidence, valuation multiples, and the cost of capital.
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Disclosure: No positions