Bank of America Corp., facing new curbs on where it can invest, says it plans to bypass private-equity firms and acquire more direct stakes in companies to boost returns.
The bank sold about $3 billion of investments in private-equity funds this year, said Jim Forbes, its global principal investments executive. Direct stakes can come with board seats, giving Bank of America better knowledge and more influence than it gets as a limited partner in someone else's fund, Forbes said.
Bypassing private-equity firms and their fees may help Bank of America squeeze out more profit and meet new U.S. ceilings on such investments. Managers typically charge 2% up-front and 20% of any returns, which have been shrinking in the past decade. Gains probably will be less than 5% annually in the years ahead, said Rob Slee, the president of Robertson & Foley, a Charlotte investment bank.
"You might as well invest in public equities for these kinds of returns," said Slee, author of a textbook on private capital markets. Only a small percentage of private-equity groups have proven they have the skills to improve operations at companies they buy, according to Slee.
B of A does not plan new investments in private-equity funds, according to Forbes, who said decisions to pare the relationships were in progress even before Congress imposed restrictions on banking activities ranging from derivatives to debit cards.
Warburg Pincus LLC is among the private-equity firms where it curtailed investments, Forbes said. Warburg Pincus spokesman Rory Mackin declined to comment, and Bank of America's Jerry Dubrowski would not name other firms that invested for the bank.
"We're very focused on control-oriented opportunities where we can have a meaningful impact," said Forbes, who joined Merrill Lynch in 1995 and was named to his current post in March 2009. "We've also been very focused on returning capital back to the bank."
Bank of America has not disclosed how much it has invested directly so far, Dubrowski said. Most of its $6.4 billion in private equity and strategic capital investments at June 30 were direct investments, he said.
Those stakes now make up about 4% of Tier 1 capital at the Charlotte company.
Bank of America reported a $1.4 billion pretax profit from principal investments in the first half of the year, about 17% of its total, though the investments were less than 1% of the bank's $2.4 trillion in assets.
Holdings include a 26% stake in HCA Inc., the hospital chain that filed for an initial public offering in May valued at as much as $4.6 billion. This would be the largest U.S. IPO in two years. Merrill Lynch bought the stake in November 2006 along with an investor group that included Bain Capital and KKR & Co.
The bank also is sole owner of NPC International Inc., the largest Pizza Hut franchisee; a 33% holder of Nuveen Investments Inc., the largest manager of closed-end funds, and controls 14% of Hertz Global Holdings Inc., the world's biggest car rental company. Bank of America is represented on each company's board.
The regulatory reform enacted in July limits, to 3% of Tier 1 capital, how much lenders can put into hedge funds and private equity.
Details on how banks can make investments in concert with outside investors still must be decided by regulators, according to a July report by the Willkie Farr & Gallagher law firm.