With Volcker Rule Knocking Credit Suisse Sells Private Equity Business

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Credit Suisse (NYSE:CS) has put in considerable effort to align its business model with the stringent Swiss capital requirement norms over the last few quarters. With its house largely in order on that front, the second largest Swiss bank now seems to be focusing its efforts on preparing itself for the U.S. Volcker Rule. That would explain the bank’s decision to sell its private-equity (PE) business Strategic Partners to Blackstone (NYSE:BX) late last month followed by its recent decision to dispose the stake its PE arm holds in Grohe, Europe’s biggest bathroom equipment maker. [1] The Volcker Rule seeks to impose a limit on the amount of its own money a bank can invest in private equity or hedge funds. Expected to be passed into a law soon as a mandatory requirement for all banks operating in the U.S., the banking giants have no option but to fall in line.

While the Strategic Partners sale is expected to close by the third quarter of the year, Credit Suisse is exploring the IPO route and is also looking for potential suitors to get rid of its Grohe stake by the end of the year. [2] Credit Suisse’s investment banking unit will be assisted by Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB) and UBS (NYSE:UBS) in the Grohe deal.

We maintain a $32 price estimate for Credit Suisse’s stock, which is about 10% higher than its current market price.

See our complete analysis of Credit Suisse here

Strategic Partners is Credit Suisse’s secondary private equity business and has about $9 billion in invested assets, which will be added to Blackstone’s investments once the deal is finalized later this year. [1] As the terms of the deals were not disclosed, little can be said about the amount of cash that will change hands in this transaction – especially given the difficulty in valuing a private equity company due to the need to value the stakes it has in each invested company.

As for the Grohe stake, Credit Suisse’s private equity arm (then Credit Suisse First Boston) acquired it in 2004 along with the Texas Pacific Group (TPG) for €1.5 billion. The stake, which is equally shared by the two PE firms, is expected to easily fetch more than €2 billion ($2.6 billion), helping them pocket a handsome profit on the deal.

Credit Suisse reports the assets managed by Strategic Partners as well as the Grohe stake as a part of assets under its global asset management business, as shown in the chart below. Once both the deals are completed, the size of assets under management should decline by roughly $10 billion towards the end of the year, taking Credit Suisse one step closer towards the Volcker Rule’s proposed 3% limit on the amount of assets counted towards private equity investments by the Swiss bank.

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Notes:
  1. Blackstone Announces Acquisition of Credit Suisse’s Strategic Partners Business, Credit Suisse News Release, Apr 22 2013 [] []
  2. Private equity owners pick IPO banks for Grohe, Reuters, May 13 2013 []
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