New rules curbing the amount of alternative investments banks can hold aren't the only thing driving private-equity spinoffs. Improving market conditions are also making it easier for investment professionals to strike out on their own.
The principals of Ridgemont Equity Partners, which was spun out of Bank of America Corp. on July 30, said Wednesday they had long been waiting for the right time to make the move. The team founded Bank of American Capital Investors in 1993, and later became top executives at BAML Capital Partners, the private-equity group formed after the bank acquired Merrill Lynch & Co.
Travis Hain, a partner and member of Ridgemont's three-person executive committee, said the spinoff was an outgrowth of discussions the principals had with B of A for several years about the direction of the business. "There was a desire on everyone's part to raise third-party capital," and it made sense to do that in a separate company even before the Volcker Rule was enacted.
"In our view, that would strengthen the private-equity business, simply because having a diverse [limited-partner] base is better than having one sole" limited partner, Hain said.
Ridgemont will manage a portfolio currently valued at roughly $1.5 billion; this represents about 23% of B of A's private-equity portfolio at June 30.
The principals of Ridgemont, who have invested over $3 billion in 140 companies, said they plan to begin raising money for a new private-equity fund within the next 12 months and wrap up fund raising by the end of 2012. They are geared to investing in midsize companies.
Trey Sheridan, another principal and executive committee member, said the new regulatory regime did have an impact on the structure of the new venture. B of A will be providing an unspecified amount of seed capital for the new fund, allowing Ridgemont to pursue new investment opportunities before it has raised money from outside investors. But because of the Volcker Rule's restrictions on the amount of private equity banks can hold, B of A's seed capital will be temporary until Ridgemont has completed its fund raising. (B of A does plan to retain its $1.5 billion stake.)
Other companies have recently reorganized their private-equity investments. In July, Citigroup Inc. agreed to transfer the management and some proprietary interest in its private-equity fund of funds and co-investment businesses to StepStone Group and Lexington Partners. In March, Wachovia Capital Partners, a private-equity firm that manages over $2 billion, said it had become independent from Wachovia Corp. and renamed Pamlico Capital.
B of A's move was not the first time it has spun off a private-equity business. In April it agreed to sell a $1.9 billion portfolio of private-equity funds to Axa SA's private-equity unit. The portfolio included a mix of assets that originally came from both BACI and Merrill Lynch.
But B of A still has a sizable private-equity business. BAML Capital Partners now has approximately 25 associates and runs $5 billion; it has invested in two new deals this year. The group specializes in mezzanine financing for profitable middle-market and large-cap ompanies.