Morgan Stanley is preparing to raise a multi-billion-dollar global infrastructure fund, but the controversial Volcker Rule limiting how much capital the bank can pledge to the fund may be problematic.
Infrastructure funds invest in assets like power grids, roads, electricity transmission and airports, providing investors with low-risk returns and a long-term investment opportunity. These private equity-like assets, however, are less liquid than stocks and bonds. Investors in the funds may see a smaller share of profits as a result of the Volcker Rule, ZACKS.com reports.
The shrink in profit has pushed many of the fund managers, who are responsible for supervising investments in the fund, to leave the firm. Further limitations would also put independent asset managers, such as The Blackstone Group and The Carlyle Group, at a competitive advantage.
Banks are also limited, as they hold capital-intensive assets, which are generally tied up over the course of several years. Banks have, therefore, been unable to reap profits from infrastructure funds, according to ZACKS.com.
Goldman Sachs faced a similar situation, as it had to reduce its fundraise target by 50 percent during the marketing process after regulators announced new regulations. Global Infrastructure Partners, a private equity firm, however, raised close to $7.5 billion in 2012 for its second infrastructure fund, making it the largest infrastructure fund raised to-date. The fund even eclipsed Goldman Sachs’ first infrastructure fund, which raised $6.5 billion in 20016.
The Volcker Rule is one of the most hotly debated provisions of the 2010 Dodd-Frank Act and could have a substantial effect on the growth of American banks. Opponents of the measure maintain that the rule would damage market liquidity, cause banks to incur increasing costs and put the U.S. at a competitive disadvantage, ZACKS.com reports.