Volcker Rule forces executives of bank-backed private equity firm to travel in search for deals
Ridgemont Equity Partners executives didn't have to go outside their home turn in Charlotte, North Carolina. This was because Bank of America Corp, its only backer, also has its headquarters there. However, BofA spun off Ridgemont in 2010 and since then, it has to raise money on its own. Its executives just completed 18 months of globetrotting this past summer in their quest for new investors and as a result, the company was able to raise $735 million, The Wall Street Journal reported.
According to the report, many more private equity executives will find themselves traveling more frequently as banking rules get revamped. The main reason for this is the Volcker Rule which compels financial institutions to divest their buyout operations. The rule seeks to limit the risk that large lenders can take using their own funds. The provisions of the rule state that banks have to greatly lessen the stakes they hold in their private equity units or sell them completely by next year, the report said.
Banks only got involved in the buyout business in the boom years that led to the financial crisis in 2008 when they played a role in the largest corporate takeovers at that time. This allowed them to enhance their bottom lines, with some bank executives getting the opportunity to earn substantial profits after they invested in buyout pools, the report said.
The Volcker Rule now curtails those profits and risks involved. The change now gives newly-independent firms and the people who run them the chance to determine if they can stand on their own feet, the report said.
Without a bank's financial support, these firms will now have to compete for investors' cash with private equity giants like Apollo Global Management and Warburg Pincus. Securities filings and private equity executives have revealed that although these newly-independent firms have exceeded their own targets, they have still secured less funds on their own than when they were backed by a bank, the report said.