Volcker to be ‘acute’ driver of secondaries dealflow

Investment banks such as Goldman Sachs – which now has a ‘Volcker implementation team’ – are expected to divest more assets this year via the secondaries market, lawyers say.

Secondaries dealflow is expected to be boosted this year as more banks respond to incoming US regulation by disposing of assets, according to private equity-focused lawyers.

“The final adoption of the Volcker Rule has been a wake-up call for many of the banks to start getting serious about disposing of their private primary assets,” said Michael Wolitzer, a New York-based partner specialising in fund formation at law firm Simpson Thacher & Bartlett. “They now face lot of concrete events with concrete deadlines.”

The rule’s final form was published in December and now the most important deadline is 21 July 2015. That’s the date by which banks must dispose of all private equity assets they are barred from holding under the terms of the Volcker Rule, a section of the US’ 2010 Dodd-Frank Act. The rule restricts banks from trading off their own accounts as well as limiting their investments in private investment funds to no more than 3 percent of any one fund’s capital. The regulations will apply to US banks and to many non-US banks that have a US presence.

When it comes to factors that will generate dealflow in the (currently booming) secondaries market, “in the next 12 to 18 months Volcker is going to be the most acute driver,” said Wolitzer. “I think 2014 will be a very active year”.

Goldman Sachs earlier this year noted it had set up a Volcker ‘implementation team’, while other banks such as HSBC, Unicredit, JPMorgan and Bank of America have already spun out – or started the process to spin-out – their in-house private equity arms.

“Secondary sales take time, so banks have already begun to dispose of private equity assets and are actively making arrangements to come into compliance in what is now a relatively short time frame,” said Joseph Marks, New York-based head of secondaries at Capital Dynamics, the private equity fund manager and advisor. “You don’t want to be the last man standing.”

While the rule isn’t ‘new’, legal sources note its final iteration published late last year proved stricter than many banks had predicted in some ways. For example, banks had hoped that they could continue to hold, until liquidation, many private equity investments they had already made. However, lawyers say that the capacity to do this is limited.

One notable exception, however, allows for investments in offshore parallel private equity funds by non-US banks, which previously hadn’t been allowed, pointed out Marco Masotti, New York-based co-head of private funds at law firm Paul, Weiss, Rifkind, Wharton & Garrison. Still, though, he said, “it will be very challenging for a US bank to maintain a significant amount of private equity investment”.

Masotti also warned of “all the indirect consequences of Volcker that will keep lawyers busy as they restructure some of their clients’ investment interests”. For example, some investors may be treated as banking institutions by Volcker due to their investment holdings in banks, he said. Insiders say this may apply to some sovereign wealth funds.

All of this is expected to fuel more secondaries dealflow. But given many banks have already started divesting their private equity holdings, “It won’t be like a snake swallowing a cow”, says Simpson Thacher’s Wolitzer.

Reporting by David Turner