Reform Expected to Speed Flow of Venture Capital
Mandaro, Laura, American Banker
Venture capital units of commercial banks are expected to receive a special boost if the financial modernization bill wending its way through Washington becomes law.
The legislation -- which would dismantle Depression-era barriers separating commercial banks, insurers, and securities firms -- would free bank-owned venture capital units to make unlimited investments in nonbank companies. The caveat is that banks would not be allowed to take management control of these firms.
Currently, bank-affiliated venture capital units may take stakes of only up to 5% of a nonfinancial company's voting stock.
"Bank-affiliated venture capital funds were at a disadvantage getting the initial round of financing, because companies knew they wouldn't be able to provide subsequent rounds of financing" due to restrictions on their level of investment, said Robert Kabel, an attorney for the Washington law firm of Manatt, Phelps & Phillips LLP.
Assuming financial modernization becomes law, banks should be able to market their investment capabilities just like venture capital units that are independent or affiliated with investment banks, he added.
But one venture capitalist at a fund affiliated with a commercial bank said the benefits of the bill would affect its administrative and legal costs more than its competitive position.
Current regulations of bank-affiliated funds "make investments more complicated," said Buzz Benson of U.S. Bancorp Piper Jaffray Ventures in Minneapolis, which has $225 million of assets under management. But he said the regulations do not "prevent us from doing any investments."
Mr. Benson, who was with the venture capital unit before U. …