" Following President Obama's shock announcement yesterday of plans to strip banks of their private equity interests, Financial News looks at the U.S. and European banks' exposure to the asset class.
The White House issued a statement yesterday, in which it said: "No bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund."
The rule in its present wording could potentially force banks to dispose of both their direct private equity arms and also their substantial fund investments in the asset class.
Should European politicians decide to follow the U.S.'s lead, as some expect, there could be a big impact on the powerful investment houses in the banks based in the region.
Tim Syder, deputy managing partner of U.K. mid-market buyout firm Electra, said a similar move in Europe would have a greater affect at the top end of the private equity market. He said: "There is going to be less private equity competition in the market as capital will be more expensive. Where it is going to have an effect is that banks are not going to be investors in funds. Funds will be harder to raise but I think that would have happened anyway."
The move is likely to further precipitate a decline in banks' holdings in private equity, which made up about 50% of the asset class in the 1980s, according to industry insiders. Bank investments in private equity now make up 9% of fund investments, according to data provider Preqin.
Bruce Ettelson, a partner at law firm Kirkland & Ellis, said: "In a world where there is less capital available for private equity and hedge funds, this will take out another source of funding.
"Banks unloading their stakes into the secondary market could cause a decline in prices and have an adverse affect on the very institutions that government is trying to buttress."