Volcker Rule Could Complicate Next PNC Buyout Fund

(Buyouts Magazine) NEW YORK – With three buyout deals closed since June, PNC Equity Partners is thinking about returning to the market to launch its third LBO fund in 2011.

But the Volcker Rule may limit the participation of its parent and anchor investor, PNC Financial Services Group (PNC.N).

PNC Financial Services Group, a Pittsburgh, Pennsylvania, bank holding company with $265.4 billion in assets, is by no means the largest bank with a private equity unit.

But its challenges may be a harbinger of issues that will face larger rivals such as Goldman Sachs (GS.N) and JPMorgan Chase & Co (JPM.N).

“We’re going to sit down with PNC in the near term and figure out how our partnership, and relationship, looks going forward,” said Jack C. Glover, a partner at PNC Equity Partners.

“They are a fabulous partner. It is our strong desire to continue the relationship with them in whatever capacity they can.”

The Volcker Rule, an element of the Dodd-Frank financial reform legislation signed into law by President Obama on July 21, limits banking companies to investing 3 percent of their core, Tier 1, capital in buyout or hedge funds.

It also limits them to holding a 3 percent ownership interest in any such fund they sponsor as of a year after launch. And the law prohibits banks from sharing its name with their funds.

The last two limitations would have an obvious impact on PNC Equity Partners. It shares the same name as its parent bank, while PNC Financial Services accounted for 27.5 percent of its buyout unit’s latest fund, the $272 million PNC Equity Partners II, closed in 2007.

The rest came from outside investors.

TIME TO COMPLY

PNC Financial Services and other banks with buyout units often make large commitments to their in-house funds to demonstrate that their interests are aligned with outside investors.

If they didn’t, investors might worry that the buyout team would put the interests of the parent ahead of theirs, such as by passing on a deal to please a favored client.

Experts who have studied the law say the full effect of the Volcker Rule might not be felt for a decade or more.

In a report issued last month, New York law firm Weil Gotshal & Manges noted that regulators have up to two years to write rules implementing the law.

After that, banking companies will have two years to comply, while regulators will be able to offer three discretionary one-year extensions, as well as additional extensions up to five years more for commitments to illiquid funds, such as private equity.

PNC Equity Partners has been in the buyout business since 1996, investing in small manufacturing, services and distribution companies generating less than $100 million in annual revenue.

The firm closed its first buyout fund, PNC Equity Partners I, in 2001, raising a $300 million fund — $180 million of it dedicated to buyouts and $120 million to mezzanine finance.

The firm is just under 70 percent the way through investing its $272 million second fund, having recently acquiring three more portfolio companies.

Oracle Elevator, of Jacksonville, Florida, is the largest independent non-union elevator service company in the nation, with revenue nearly $50 million, according to Glover.

Wheaton Industries, of Millville, New Jersey, is a maker of glass and plastic laboratory supplies and equipment.

And Revolution Inc sells dancewear directly to dance studios, mostly for child and teen-aged dancers.

Many partnership agreements allow buyout firms to start raising a new fund when their prior partnership is 75 percent invested or committed to follow-on investments.

By Steve Bills of Buyouts Magazine