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Banks’ appetite for private equity in light of regulatory changes

by Joanna Nye

  • 13 Jun 2012
  • PE

Investing in private equity funds has become far more challenging for banks following recent regulatory changes, such as Basel III in Europe and the Volcker Rule, part of the Dodd Frank Act, in the US, both of which have placed restrictions on the ability of banks to invest in the asset class.

Preqin recently interviewed a sample of 50 banks in order to gain an insight into their views and preferences regarding the asset class, including what impact, if any, recent regulatory changes have had on banks’ private equity programs. The full results of this study are included in our special report, Banks as Investors in Private Equity.

Our study highlights that over a third of banks (38%) anticipate committing capital to private equity funds over the next 18 months, demonstrating that many banks continue to have an appetite for the asset class. However, over a quarter of banks (27%) do not expect to make new commitments to private equity funds before 2014, and a further 10% no longer invest in the asset class.

Banks were asked what they saw to be the biggest challenges facing their private equity programs at present. The highest proportion, just under a third (30%), cited regulatory changes. When asked what impact regulatory changes have had on their private equity programs, just over a quarter (26%) revealed that they have either ceased investing in private equity or reduced their level of activity in the asset class. Over the longer term, 45% of banks expect to reduce their private equity exposure or cease investing in the asset class.

It is interesting to note that, of the 26% of banks that have stopped or reduced investment in the asset class, 90% are based in either North America or Europe, the regions directly impacted by Basel III and the Volcker Rule. These regulations will continue to have a significant impact on banks investing in private equity, particularly those based in the US.

However, many of the banks not affected by regulatory changes look likely to continue investing in the asset class. Sixteen percent of banks informed us that they expect to increase their exposure to the asset class going forward and a further 59% are looking to maintain the level of their allocations to private equity.

Preqin's Investor Intelligence database currently tracks 240 banks worldwide, with this investor group accounting for 6% of all investors in private equity funds.

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