What's to blame for bank moves on private equity?
It would be easy to blame the Volcker Rule for some the recent moves by banks such as Goldman Sachs, Bank of America and Citigroup to scale back their private equities units. In some cases, there's some truth to the concept.
The WSJ, for example, recently noted that "the looming 'Volcker rule' is expected to sharply reduce the bank's investment in its own funds. That is forcing Goldman to make major changes in a $50 billion business that has reaped big profits for the bank and its employees and clients. Goldman likely will have to shrink the size of its own investment in its funds to just 3% from as much as 37% once the rule is finalized later this summer."
That said, there may be sound reasons apart from looming rule to scale back. The facts is that, despite the Dell LBO, there may be some opportunity costs to staying heavily invested in the LBO business.
There will undoubtedly be some big deals announced going forward, but they will be fewer, and banks would likely be wise to redeploy their investments, even if the rule imposed no changes. Indeed, for years, most private equity firms have been diversifying away from core buyout operations as their primary revenue source.
We've seen a similar phenomenon in other areas. Dodd-Frank was widely blamed for leading banks to scale back some proprietary trading activities, but some of those activities had become much less profitable and perhaps were ripe for restructuring anyway.
- here's a Forbes article