Goldman Sachs and Morgan Stanley plan to stay the course in private equity. At least for the moment. But restrictions that they face as bank holding companies do raise questions as to whether they would keep their merchant banking operations, as presently constitutued, over the long term.
Goldman Sachs has a much greater presence in the asset class than does Morgan Stanley. Through its
A spokesperson for Goldman Sachs told Buyouts: “We’re not expecting any change to our business,” and that will certainly be true in the near-term. Both Goldman Sachs and Morgan Stanley have a two-year period to make sure all of their businesses are compliant with the Federal Reserve’s requirements. And even then, after that period, the Fed would have the option of granting up to three one-year extensions.
For its part, Morgan Stanley has been involved with private equity since the mid-eighties, investing more than $6 billion in equity since that time, according to its Web site. The current
Morgan Stanley also doesn’t expect the shift in status to have a tangible impact. “The Firm does not expect significant adverse tax or accounting effects from this new status, nor does the Firm expect there to be limitations on its activities that would have a material impact on Morgan Stanley’s overall business,” said Marie Ali, a company spokeswoman.
Still, according to industry observers, the companies will face restrictions in how hands-on they can be with the management of any portfolio companies in businesses outside of financial services. Bank holding companies are able to invest in private equity through the “merchant banking exception” that allows them to form non-bank subsidiaries to engage in the practice. Those subsidiaries face a 10-year maximum holding limit, and the running of the business must be left to managers outside the merchant banking arm, although some influence, such as a presence on the board of a portfolio company is acceptable. The fund-of-funds businesses are less likely to be impacted because of their inherent distance from the day-to-day operations of portfolio companies.
Under these rules, other bank holding companies have maintained modest private equity operations. JPMorgan Chase, for example, operates
Citigroup also has a presence through its Citi Alternative Investments unit. As of June 30, this group had more than $54 billion in un-levered capital under management, including the hedge fund, real estate, global fixed income and infrastructure asset classes as well as private equity. About 22 percent of that, or $11.9 billion, was proprietary capital from Citigroup. The company’s private equity business consists of Citi Private Equity, which oversees more than 300 limited partnership investments and upwards of 75 direct investments, and its strategic relationship with Metalmark Capital, a New York-based shop with a strategic focus on platform investing. Ironically, Metalmark Capital has its roots in Morgan Stanley. The firm was founded by former principals of Morgan Stanley Capital Partners in 2004 and it still acts as subadvisor for certain related funds.
Michael Wolitzer, a partner with Simpson Thacher & Bartlett LP who focuses on private investing, noted that both companies will have plenty of time to sort things out.
“It will be interesting to see if the laws evolve, given the circumstances,” Wolitzer said. “The Federal Reserve has already reacted with changes to the restrictions on bank ownership. There may be more that needs to be clarified.”