Implications of the Volcker Rule on venture capital investments

by Joanna Nye

  • 24 Jan 2012
  • PE

The Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly referred to as the ‘Volcker Rule’ is scheduled to take effect in July of this year, as part of the Dodd-Frank Act which was passed in 2010. The Volcker Rule was introduced with the aim of preventing banks from engaging in high risk investments, such as private equity, but was not drafted with the intention of affecting venture capital investments.

Mary Dent, general counsel for SVB Financial Group, has recently warned that venture capital investments are at risk of being affected by the rule, in particular investments in start-ups, which it sees as being important in ensuring economic growth and stability. Silicon Valley Bank itself is an active investor in venture funds, with previous investments including a commitment to US venture vehicle, DBL Equity Fund BAEF II.

Preqin’s Investor Intelligence research has found that a number of US-based banks have stopped investing in private equity due to the regulations laid out by the Volcker Rule. Of those which have been found to have stopped investing for this reason, including a bank based in California, and another based in Ohio, Preqin has found that the majority would be keen to continue to invest in the asset class, should there be a change to regulations.

Preqin’s Investor Intelligence database holds information on 4730 investors, of which, 3730 are actively investing in private equity. Preqin tracks 59 US-based banks, and of these, 45.8% are currently not investing in private equity funds, with a number of banks not investing as a result of the Volcker Rule. Of those who are currently still investing in private equity funds, 85% of US banks have shown a preference for investing in venture capital funds. US banks make up 1.5% of active US-based investors who have shown a preference for investing in venture vehicles, and 0.8% of all investors currently investing in private equity with a preference for venture funds.

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