An Influx of VC Funds Could Be Coming From Banks

Upcoming changes to the Volcker Rule “will embolden large banks to raise new vehicles,” according to PitchBook analysts.

Paul Volcker, former chairman of the U.S. Federal Reserve. (Pete Marovich/Bloomberg)

Paul Volcker, former chairman of the U.S. Federal Reserve.

(Pete Marovich/Bloomberg)

Banks were barred from directly raising hedge funds and private capital funds after the financial crisis. With some of those rules set to be relaxed on October 1 — including restrictions pertaining to venture capital and private debt — large banks are likely to jump on the opportunity to freely raise private capital funds, according to PitchBook analysts.

In a note published Tuesday, the data firm’s analysts explored the potential impacts of new revisions to the 2014 Volcker Rule, which will allow banks to invest in direct lending funds and venture funds as both a limited partner and a general partner.

“We do not see a need for additional large-scale VC funds in the market but believe the revisions will embolden large banks to raise new vehicles,” PitchBook analysts James Gelfer, Dylan Cox, and Hilary Wiek wrote in the note.

[II Deep Dive: Fed’s Proposed Volcker Rule Changes May Benefit VC Firms]

The original Volcker Rule had also restricted banks from raising leveraged buyout funds and hedge funds. However, “most of the large banks seem to have found ways to avoid full compliance with the Volcker Rule, continuing to hold investment funds and seeking extensions from the requirements to sell them as recently as 2017, well after compliance was to have been mandatory,” the analysts wrote in the note.

For example, they said that banks including Goldman Sachs Group “took advantage [of] the rule’s exemption for ‘merchant banking’ activities, raising and operating funds through those divisions.” Others “continued to conduct large private market operations via funds-of-funds, secondaries, and advisory services,” the analysts wrote.

“Because many banks were able to avoid the full scope of the original Volcker Rule, we believe they will be prepared to take advantage of the new revisions,” they added.

According to the note, Goldman Sachs has already announced plans to raise a $2 billion venture and growth fund, while Citigroup launched an impact venture capital fund earlier this year.

In addition to the venture capital exemption, the Volcker Rule revision will also allow banks to invest in direct lending funds. According to PitchBook’s analysts, this means “more capital flowing into an already crowded market.”

“Notwithstanding the current Covid environment, deal terms and pricing could tighten even further for mid-market direct lending opportunities due to the heightened capital availability,” they wrote.