PNC Financial Services Group Inc. has decided to do away with limited partners for its latest mezzanine fund, instead providing the full $500 million from its own balance sheet to its affiliate PNC Mezzanine Capital, sources told sister publication Buyouts.
The move by the Pittsburgh bank is an apparent response to the Volcker Rule, a provision of the Dodd-Frank financial reform law that limits banks’ participation in private equity and hedge funds.
Under the Volcker Rule, a bank can put no more than three percent of its core, Tier 1, capital in buyout or hedge funds. It also can hold no more than a three percent ownership interest in any such fund it sponsors as of a year after the fund’s launch.
By not opening the fund to outside investors, PNC is seeking to avoid the restrictions of the Volcker Rule and to continue doing deals in the mezzanine asset class, where interest rates are higher and the returns greater than for most other categories of loans, one source said.
Banks nationwide are re-examining their roles as fund sponsors as a result of the rule. Bank of America Corp. spun off one buyout group in June, as a team of 15 investing pros set up an independent shop in New York called North Cove Partners. It was the second such deal for B of A in a year; the Charlotte bank spun off Ridgemont Equity Partners last summer.
Since its establishment in 1989, PNC Mezzanine has made 88 investments in 53 portfolio companies to support 132 transactions, according to its Web site. In all, the business has invested more than $544 million. PNC Mezzanine seeks to cut checks of $10 million to $40 million and can lead investments up to $60 million, the Web site says.
PNC declined to comment for this story, saying the bank is still evaluating its response to the Volcker Rule. But executives have acknowledged the difficulty. Jack C. Glover, a partner at a sister shop, PNC Equity Partners, told Buyouts last summer that the rule would complicated efforts to raise the firm’s next fund.
Other institutions apparently are considering taking the same tack as PNC, bringing their direct investing activities onto their own balance sheets to avoid dealing with outside investors and triggering Volcker Rule provisions, said one source, a banker who asked for anonymity because he was discussing competitors.
The impact was ironic, the banker said: The Volcker Rule was designed to reduce risk in banks’ portfolios, but by excluding third party investors, the portfolios are becoming more concentrated.
Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at email@example.com.