Bank of America Corporation (BAC) has spun off its private equity wing Banc of America Capital Investors to form Ridgemont Equity Partners. Ridgemont will manage a portfolio of about $1.5 billion or approximately 23% of BofA’s private equity portfolio as of June 30, 2010.
The decision to spin off the private equity division followed the regulatory reform bill that became law in July 2010. Since the enactment of the law, this is the first private equity business to have branched out from a bank.
Banc of America Capital Investors has invested over $3 billion in 140 companies since 1993. Now the principals of Ridgemont will continue to manage the legacy Banc of America Capital Investors portfolio on behalf of BofA. Ridgemont intends to raise a new private equity fund in the near future to focus on middle-market buy-out and growth equity investments of $25 million to $100 million.
Headquartered in Charlotte, Ridgemont will target companies in basic industries, consumer & retail, energy, healthcare, telecommunications, media, technology and financial services. The team will have 19 investment professionals.
According to the regulatory reform, banks will be restricted from investing more than 3% of their capital in private equity in the long term. There is significant regulatory pressure on banks to put more capital against such private equity investments. Also, banks are experiencing decreasing returns from private equity. As a result, many of the banks have been contemplating divestments of their private equity arms.
Among the major U.S. banks, Goldman Sachs (GS) and Citigroup (C) have significant private equity exposures. These banks are considering a number of options to comply with the new regulations.
BofA’s second quarter earnings came in at 27 cents per share, 3 cents ahead of the Zacks Consensus Estimate of 24 cents. However, this compares unfavorably with the earnings of 33 cents in the prior-year quarter.
Lower credit costs and sale of non-core assets were primarily responsible for the better-than-expected results. However, pressure on trading and mortgage banking income was the primary offsetting factor. An increased charge related to the U.K. payroll tax was also among the negatives.
Though continuing pressure on trading revenues will hurt the profitability of BofA in the upcoming quarters, a slowdown in loan loss reserves like other large banks will support the bottom-line.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
Zacks Investment Research
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