Does the watered-down Volcker Rule prevent banks from providing leverage to transactions sponsored by their in-house private equity funds? That’s my gut reaction to the following language, which can be found in Title VI of the financial reform bill released this morning:
‘‘(1) IN GENERAL.—No banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity fund, or that organizes and offers a hedge fund or private equity fund pursuant to paragraph (d)(1)(G), and no affiliate of such entity, may enter into a transaction with the fund, or with any other hedge fund or private equity fund that is controlled by such fund, that would be a covered transaction, as defined in section 23A of the Federal Reserve Act (12 U.S.C. 371c), with the hedge fund or private equity fund, as if such banking entity and the affiliate thereof were a member bank and the hedge fund or private equity fund were an affiliate thereof.
Wall Street caught some big breaks in this bill, vis-a-vis private equity. Banks will still be allowed to sponsor in-house funds, so long as they: (1) Stay below capital commitment caps; (2) Do not use their “brand” to name the funds; and (3) Prevent employees from investing in the funds, unless the employees work directly on the funds.
But this leverage restriction could trump all of that. In fact, it could be a backdoor that effectively forces banks to divest of their in-house PE funds (if they have to choose to participate in equity or debt, they’ll choose debt).
Unless I’m reading this wrong… Am I?