PwC Survey: Volcker Rule Creates Uncertainty Around Alternatives Divestment

(May 4, 2011) — According to a report by PricewaterhouseCoopers (PwC), US financial firms are awaiting Volcker Rule clarity before they reevaluate their existing relationships and divest hedge funds and private equity funds.

“The rule is that banks will be prohibited from certain activities, so there’s a lot of uncertainty,” PwC’s John Marra told aiCIO. “As with any business, banks want to divest as slowly as possible to preserve value.”

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule limits proprietary trading and hedge fund and private equity fund sponsorships by banks and their affiliates and holding companies. While some divesture activity may result as firms seek to avoid the restrictions imposed by the legislation, the report asserts that US banks and financial firms will await Volcker Rule interpretation before they make major divestments. “US banks and broker dealers are unlikely to make hasty moves to divest their hedge fund and private equity businesses until there is further clarity regarding the impact of this rule,” according to the report.

“The Volcker Rule, while expected to be effective in 2012, will provide a transition period for the new regulations that can be extended a number of years with regulatory approval, especially for holdings of illiquid funds,” the report states.

Investment banks such as Goldman Sachs and Citigroup have already indicated their intentions to divest their hedge fund and private equity holdings as they will be directly affected by this rule.

According to Marra, there will be greater growth in M&A activity within the asset management space, with the finalization of regulatory changes likely spurring the growth of activity. “The post-financial crisis recovery in the equity markets has driven significant increases in management and performance fee income, pushing valuations higher and fostering greater M&A activity in the asset management space,” the report indicates. “We expect to see continued M&A activity in the asset management space driven largely by small to medium-sized asset managers, albeit at a slower pace than has been observed recently. Changes in the regulatory landscape resulting in the need for greater cost efficiencies, scale, and also the need for broader product offerings, will drive much of the consolidation in this market.”

Additionally, PwC says that foreign buyers, particularly those in Asia, will continue to explore the US markets for acquisitions.