Dan Primack

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?

The London Business School and HEC Paris this morning released a new study on private equity returns, with a particular focus on European buyout firms. They found that their sample -- provided by fund-of-funds manager Pantheon -- does indeed produce alpha, net of fees and carry. It is worth noting that the research was sponsored by an industry trade group (BVCA), although it was conducted independently. Download it here.

I'm loathe to lead a blog post by admitting ignorance, but here goes: I don't know if the financial reform bill that emerged today would ban banks from sponsoring in-house private equity funds. The original House and Senate language included such a ban, under the Volcker Rule rubric. The result likely would have been that banks like Goldman Sachs, Merrill Lynch and J.P. Morgan would have been required to divest existing operations (probably via a combination of management spinouts and secondary sales). But it's being suggested that the restrictions was stripped from the amended bill, which doesn't seem to yet be publicly available (thus my ignorance). Instead, the only relevant language may be that banks -- or certain banks, thanks to some weight-throwing by State Street lobbyist Sen. Scott Brown -- can't invest more than 3% of their capital into PE or hedge funds.

The last time I spoke with Jeff Rosenkranz was March 2008, just after he stepped down as head of mid-market banking with Piper Jaffray. Pretty good timing, and Rosenkranz enjoyed semi-retirement while the economy burned. Now he's back, launching a new mid-market investment bank called Metronome Partners. "I loved the time I had with my family over the last couple of years, but I began to get an itch to get back into the business last winter," Rosenkranz told me this afternoon. "I thought long and hard about whether to join a bigger firm or do something on my own, and ultimately decided to do it on my own. I think it's the relationships that matter the most, and wanted to do it in a way that can really focus on the quality of advice, rather than the quantity."

Private equity activity is on the rise, according to preliminary Q2 data released today by Thomson Reuters (publisher of peHUB). Global PE-backed deal volume hit $43 billion last quarter, which is up 54% from Q1 and a whopping 148% from the second quarter of 2009. The numbers were even better for PE-backed deals targeting U.S. companies, where $25 billion marked the richest quarter in two years. European deal volume dropped 26% from Q1, but year-to-date activity is up 110% from the first half of 2009. Asia-Pacific volume also increased substantially. It's important to note that these numbers include "announced" deals that have not yet closed, which is why the largest transaction of 2010 is the $3.9 billion buyout of hotel chain Extended Stay by Centerbridge Partners, Paulson & Co. and others. Also worth noting that while these numbers were produced by my corporate overlords, I've already spotted a few problems. For example, Healthscope is listed on a list of top deals. Actually, it's listed twice -- once with KKR as sponsor, once with Blackstone. Maybe that's because the two firms are still competing in an auction... Well, I guess that's why the data is "preliminary."

This summer was supposed to represent a regulatory tipping point for private equity, as U.S. and European legislators pledged to close tax loopholes and reduce perceived systemic risk. Private equity firms would have to register their funds, and provide additional disclosures. Carried interest would be taxed as ordinary income. U.S. banks would be required to divest private equity holdings, while European institutions would effectively be banned from serving as limited partners in North American or Asian funds. It was almost as if regulators had discovered a speck of residual shine on private equity's Golden Age, and were determined to dull it down. But a funny thing happened on the way to the reckoning: Many of the proposed changes -- including some that many PE pros have accepted as fait accompli -- are being watered down, postponed or abandoned.

Late last year, The Carlyle Group signed a 35-year public/private partnership with the State of Connecticut, whereby the firm agreed to redevelop, operate and maintain the state’s 23 highway service areas. Among the improvements, Carlyle said that it would supplement the McDonald’s drive-thrus at the I-95 rest stops with Subway and Dunkin’ Donuts drive-thrus (Subway’s parent company was a partner on the deal). This transaction was a landmark for public-private partnerships in the U.S., which has lagged behind other industiralized nations in putting investment shops like Carlyle in operational control of its toll roads, bridges, ports, etc. For those of us who drive regularly between Boston and New York City, however, it was about finally having some better food options (and, hopefully, cleaner facilities). Our collective arteries applauded the news.

Bloomberg reported this morning that KKR may postpone its planned $500 million flotation on the New York Stock Exchange, due to market volatility. Makes sense, given general market volatility and the particularly harsh treatment of Blackstone and Fortress shares (trading at around $10 and $3 per share, respectively). What is worth noting, however, is that a share sale postponement has absolutely no impact on KKR's larger plans to list itself on the New York Stock Exchange (Bloomberg got this correct in its story, but some emailers appear to have stopped after the headline).

I keep hearing talk that some top-tier PE/VC funds have “legislation triggers,” or clauses that give GPs the option to alter fund terms due to the passage of . The most obvious trigger would be a change to carried interest tax treatment, but it is not the only one (could a new term be "MALs" -- material adverse laws?) I’m looking for some specific examples, so please drop me a (confidential) note if you know of any....

We've written a lot about LP/GP power dynamics, in which LPs have begun to flex their little-used muscles. Now we have some actual data to back up the anecdotes. Private equity research firm Preqin just sent over results from a survey of 50 institutional investors, showing that fund terms have become more LP-friendly over the past two years. Here are some examples: