Volcker Rule affects venture industry

At least one corporate-backed venture firm has raised the issue of the so-called "Volcker Rule" designed to restrict banks’ proprietary trading and alternative investments.

Physic Ventures, a US-based venture fund, is understood to have written to the US regulators, the Securities and Exchange Commision (SEC) and Federal Reserve (see letter), after one of its prospective investors – called limited partners – was affected by the potential implementation of the Volcker Rule.

William Rosenzweig [pictured collecting a business for peace award two years ago], a managing director and co-founder of the US-based venture firm backed by consumer goods companies, wrote a letter to the SEC last week warning the incoming regulations had jeopardised a $25m investment in the firm’s fund. Rosenzweig declined to comment beyond his letter for this article. (Editor’s Note: After having given a right of reply to Physic and the SEC the letter was subsequently removed from the website.)

Rosenzweig said in the letter: "We are now in the process of raising our second fund and find ourselves with a considerable and unexpected setback linked to the Volcker Rule."

He said the company had been in the process of raising the $25m from a bank. Physic Ventures’ first fund raised $159m in 2008, although it is unclear how much its second fund is aiming to raise.

This summer the undisclosed bank was understood to have discussed the commitment but was affected to at least postpone an investment due to the Volcker Rule.

Rosenzweig added: "I understand you [the SEC] are working with the regulatory agencies to ensure the Volcker rule is implemented in a way that will not harm our economy by artificially and unnecessarily restricting banks’ ability to invest in venture capital funds. I am writing to commend you for that work and to offer Physic Ventures’ experience to support your efforts."

Jos van Gisbergen, a senior portfolio manager at pension fund management firm Syntrus Achmea, said: "In general the Volcker rule has had a negative impact on the industry. I have not heard many groups blaming the Volcker rule as the sole source of their problems. Many groups are in trouble in fundraising as private equity firms have not returned enough money to investors, which leaves them with less and less room to make new commitments."

Van Gisbergen added: "Companies which have problems with the Volcker rule are the innovative venture and small cap type companies. This is the part of the world which generates new jobs and exactly the part where banks are not able to move any more. This is not only the Volcker Rule but also due to banks not being in the best shape."