Volcker Rule discouraging investment in private equity

The controversial Volcker Rule, though not yet finalized, is already having an impact in the private equity market, discouraging banks from investing in the private equity market.

“The banks had been investing in us off of their own balance sheets, and none of them came back,” Brian Rich, a co-founder and managing partner at private equity firm Catalyst, said, according to CNN Money. “So, we basically had to reinvent our limited partner base.”

Similar cases have arisen across the financial industry. Charlie Eaton, the head of Eaton Partners, said that “banks are almost non-players” in the private equity market as a result of the Volcker Rule, CNN Money reports.

The Volcker Rule, a provision of the 2010 Dodd-Frank Act, prohibits banks from engaging in proprietary trading—or risky investments with client funds. Investment in private equity funds is also prohibited, though there is an exception for in-house private equity funds and funds-of-funds as long as certain requirements were met.

Regulators had until July 21 to publish the final rules, but sources now maintain that the rule will not likely be finished before Labor Day. As the rule meets opposition from certain members of Congress, the final language may not even be published until 2013.

Banks, however, are acting as if the rule is already in place.

“I don’t think anyone fully knows how these rules are going to play out, but the uncertainty is causing financial institutions to pull back,” Eaton said, according to CNN Money. “They don’t want to make commitments to lots of funds and then be under pressure to divest.”

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