Banks far down the spinout trail?
HSBC Private Equity Asia's spinout comes as no surprise.
Some might even ask why George Raffini waited so long. With a respectable-to-strong investment track record that is one of the longest in an industry desperately short on long-term experience, plus a position at the head of a multi-billion dollar vehicle, he ought to be the ideal leader in a bid for indepencence. Yet, after some 12 years with the big grey monolith at 1 Queen’s Road in Hong Kong, no one can accuse him of conspicuous disloyalty or rocking the boat.
All the same, US regulatory pressure with the “Volcker Rule” plans was obviously pushing at a half-open door at HSBC Holdings when it came to the prospect of detaching its private equity funds. Tough new Basel II restrictions on leverage levels, exposure to risk-based assets, and other related areas were in fact probably more important, in making private equity an increasingly unrewarding business for banks. Indeed, Barclays Capital, to name but one major bank, apparently saw the chance to buttress its core Tier 1 capital ratio as one of the main attractions of spinning out its Barclays Private Equity business concurrently with HSBC.
Besides, HSBC’s $8.8 billion global in private equity funds under management was hardly the world’s largest, and gave it little scale to compete convincingly as a major player in the asset class, but also left it at little risk from the final version of the Volcker Rule stipulation that a bank could invest up to 3% of its Tier 1 Capital in private equity or hedge funds. As of mid-2010, HSBC claimed a Tier 1 capital ratio of 9.9%, and with a market capitalization of over $180 billion, no one could seriously imagine that its private equity exposure presented a serious systemic risk. The actual economics of its private equity business, as impacted by new regulation, are probably a far more important consideration.
Yet the regulatory risk around bank participation in private equity is not just about immediate pressures, but also about the potential regulatory climate over the entire 8+ years of a typical fund. And even the largest and most robust players are not immune. For instance, rumors indicate that Goldman Sachs, the doyen of balance-sheet investing, with what in-house investment star Mark McGoldrick described as a huge appetite for risk, is still deliberating the spinoff of its own PE business, which some estimates put at $82 billion, meaning that up to 30% of the bank’s own money, when factoring in market appreciation, could be in its PE funds. Even accepting that Goldman is a unique case, third party PE LPs may simply decide that bank-connected funds have an extra level of regulatory risk that they don’t need, and stick with independent firms instead.
Plus, some of the less overt tweaks in the Volcker provisions make in-house funds even less appealing, and less likely to perform. Banks will no longer be allowed to use their own name in sponsoring in-house funds, losing an important branding factor. Plus, bank employees outside the funds’ immediate team will not be allowed to invest in the bank’s own funds, lessening buy-in from the rest of the group.
All in all, then HSBC’s move is unlikely to be the last. Look around the Asian market at the few bank-connected funds still in business, and you could start taking bets on which will be the next to go within the two-to-five-year compliance window laid down by the Volcker Rules. For, with or without Volcker, this just may not be the best business for banks to be in.
Further reading
More on Greater China
Latest News
Asian GPs slow implementation of ESG policies - survey
Asia-based private equity firms are assigning more dedicated resources to environment, social, and governance (ESG) programmes, but policy changes have slowed in the past 12 months, in part due to concerns raised internally and by LPs, according to a...
Singapore fintech start-up LXA gets $10m seed round
New Enterprise Associates (NEA) has led a USD 10m seed round for Singapore’s LXA, a financial technology start-up launched by a former Asia senior executive at The Blackstone Group.
India's InCred announces $60m round, claims unicorn status
Indian non-bank lender InCred Financial Services said it has received INR 5bn (USD 60m) at a valuation of at least USD 1bn from unnamed investors including “a global private equity fund.”
Insight leads $50m round for Australia's Roller
Insight Partners has led a USD 50m round for Australia’s Roller, a venue management software provider specializing in family fun parks.