KeyCorp Spins Off PE Affiliate, Key Principal Partners, Which Leads to Cyprium Launch

Dodd-Frank has claimed its latest victim.

Cleveland-based KeyCorp, which has about $90 billion in assets, has decided to no longer invest in PE funds. The bank has spun off its PE affiliate, Key Principal Partners Corp., says Leland Lewis, a KPP managing partner based in New York. Executives of Key Principal Partners have launched a new firm, Cyprium Investment Partners, that retains the investment mandate of KPP, he says.

KeyCorp’s decision was in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed last summer, Lewis says. Dodd-Frank bans banks from investing in and running hedge and PE funds.

“Key Principal Partners is no longer,” Lewis says.

KeyCorp was KPP’s largest investor. The firm’s most recent fund, KPP Investors III, raised $500 million in 2007. Half of that, or $250 million, came from KeyCorp. Cyprium will still manage any current funds for KeyCorp, but the bank will not be an investor in any future pools, Lewis says. About 75% of the third fund is invested, Lewis says. KPP’s second fund raised $520 million 2002. All of Fund II is invested, he says.

“No, we’re not sad,” Lewis says. “Because of Dodd-Frank, it became increasingly complex to be associated with a bank. That said, Key’s been a great partner and we’ll certainly miss the people and their support.”

KPP was founded in 1998. All of its executives, including John Sinnenberg, a managing partner in Cleveland, joined Cyprium (Timothy Fay, an MP in San Francisco, is joining Seacost Capital Partners, Buyouts reported in March).

Cyprium will retain its offices in New York and Cleveland. San Francisco was closed a few months ago with the departure of Fay, Lewis says. All KPP Investor funds will be re-branded as Cyprium Investment funds. Everything else, from the KPP web site, email addresses and the shingle on the door, has also been switched to Cyprium, Lewis says.

“We’ve become fully independent of KeyCorp,” Lewis says.

Cyprium–which is Latin for copper (a highly durable metal that becomes tough when forged)– focuses mainly on minority investments using subordinated debt or equity. The firm will take control positions selectively. A generalist, Cyprium will invest $10 million to $40 million per deal. However, the PE firm favors manufacturing or distribution companies, Lewis says.

Later this year, Cyprium plans to begin fundraising for its fourth fund, Lewis says. “The target will be similar to past funds,” he says.

KeyCorp is the latest firm to spin out its PE affiliate. In April, Bank of America spun out its PE business, BAML Capital, which has more than $5 billion in assets. BAML became part of BofA when the bank acquired Merrill Lynch in 2009. Last year, BofA also shed its legacy PE arm, which is now called Ridgemont Capital Partners.

After all this, what does Lewis think of Dodd-Frank? The law also requires PE firms with $150 million or more in capital to register with the SEC

“There are certain regulations affecting our industry that aren’t particularly helpful,” he says. “The whole idea that we need to register as registered advisors doesn’t make a lot of sense to me. It doesn’t add value to our investors or industry. I can’t really comment on the rest of it.”

Officials for KeyCorp couldn’t be reached for comment.