Goldman Sachs has already changed the way it’s investing in private equity (PE) to comply with upcoming Frank-Dodd regulations, namely the Volcker rule. In a recent deal for PSAV, Reuters reported that the firm underwrote the equity in the deal without using a PE fund to finance it, instead lining up clients who were willing to invest in the company through separate accounts. It doesn’t appear that the Volcker rule, which is slated to go into effect next July, would prohibit such an arrangement.
The Volcker rule will limit investment banks from contributing more than 3% of their Tier 1 capital to private equity funds, hedge funds and proprietary trading. The way the law is structured, banks may be allowed to keep making PE investments using their own capital (or their employees’), as long as the money doesn’t originate from a bank-sponsored PE fund, or a “covered fund.” Wells Fargo is doing pretty much the same thing as Goldman—avoiding outside equity. The San Francisco-based bank is going forward with buyouts and venture capital deals through merchant banking transactions, a somewhat riskier route than traditional PE transactions, which appear to pass under new regulations. As long as banks are investing alongside third parties instead of covered funds, the new regulations likely won’t affect them.
Wells Fargo and Goldman Sachs won't have a lot of company going forward. Click here to see which banks are dropping out of the industry altogether, and how much Goldman and Wells Fargo have made in the meantime by staying in.