Preqin: New Banking Regulations Would Decimate Alternative Asset Sector

Includes: BK, C, CS, GS, JPM, MS
by: Streetwise Blog

By Andrew Willis

The alternative asset community is up in arms over U.S. President Barack Obama’s plan to force banks out of private equity and hedge funds.

As part of a larger move to strip risk out of major financial institutions, the President is pushing a ban on U.S. banks “owning, investing in or sponsoring” private equity and hedge funds, a move that would devastate the sector. A well-regarded U.K. alternative asset service named Preqin - the Brits have had a few more hours to build a sense of indignation - is out on Friday with data showing how badly alternative asset managers would be hurt, and a view that this policy targets a problem that doesn’t exist.

“Whatever role banks had in the financial crisis, one thing is clear: it was not the bank’s ownership of or investment in private equity and hedge funds that caused the problems,” said Preqin spokesman Tim Friedman.

“Although the full implications of Obama’s statement remain unclear, the potential disruption that such widespread reform could bring to the alternatives industry is significant, and could affect hundreds of banking institutions,” said Mr. Friedman in a press release. He added: “It is important to note that any effects of this proposal would also be felt further afield, with many U.S. institutions also investing in European and Asian funds.”

Here’s Preqin’s first take on just what U.S. regulators will shake loose if they do follow through with an alternative-asset ban:

• U.S. banking institutions managing private equity funds and fund of funds have raised a total of 60 funds since 2006, with a total value of more than $80 billion (U.S.).

• U.S. banking institutions currently have a total of 18 new private equity funds in marketing mode, seeking an estimated $18 billion.

• In total, banks have $50 billion in private equity dry powder (that’s capital available to them to spend on new investments).

• Although many banks have spun out their merchant banking operations in recent years, there remain some significant players in this market. The most prolific banks in this area include Goldman Sachs (NYSE:GS), Credit Suisse (NYSE:CS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C).

• There are 16 banks with fund-of-private-equity-funds divisions currently managing investments worth $94 billion.

• On the hedge fund side, bank-owned fund-of-hedge-fund units represent more than $180 billion in assets, or approximately 16% of all U.S. capital flowing into hedge funds.

• Large U.S. banks in the hedge fund industry which could be heavily affected by Mr. Obama’s proposals include Goldman Sachs, Bank of New York Mellon (NYSE:BK), Credit Suisse and JP Morgan (NYSE:JPM).