AppId is over the quota
AppId is over the quota
By Simon Meads
LONDON | Thu Jan 19, 2012 2:04pm GMT
LONDON (Reuters) - Firms that make a living buying and selling companies for profit face a funding squeeze and a much more distant relationship with bankers as European banks retreat from the private equity circuit they splurged tens of billions on over the past decade.
In anticipation of regulation that makes holding private equity assets more costly, many banks are turning off commitments to new funds and jettisoning their existing assets.
It spells the end, at least for now, of a relationship forged to be mutually beneficial. Banks would back big buyout firms in order to win business for their lending and advisory arms, a move some argue was ultimately unsuccessful for them.
"That's a whole slice of private equity firms' funding that has gone for the next fundraising at least," said Mathieu Drean, managing partner at Triago, a group that helps firms raise money and brokers deals between investors.
Banks and financial institutions make up a sizeable chunk of private equity firms' investor base; about 5 percent of Apax Partners' , 13 percent of Cinven's , 16 percent of Terra Firma's and 3 percent of Permira's last fund, according to data on their websites and in their annual reports.
Based on the size of their current funds, that makes about $2.5 billion (1.6 billion pounds) those firms will struggle to count on for their current or imminent fundraisings.
For some smaller funds in the United States, banks accounted for more than half their investor base, Drean said.
Given the economic climate, there is not much buyout action going on at the moment anyway, but "When these firms come back they will need to reinvent a fair part of their investor base," Drean added.
At the end of 2011, banks accounted for 8 percent of capital invested in private equity worldwide -- some $110 billion, according to data group Preqin.
That proportion has fallen from 11 percent in 2008, as banks including Citigroup (C.N), Barclays (BARC.L) and Credit Agricole (CAGR.PA) have chipped away at their exposure, offloading some sizeable portfolios, particularly in the past year.
RELATIONSHIPS FOR SALE
The trend for banks selling private equity assets will accelerate in 2012, as they prepare for the arrival of Basel III regulations that will make holding risky private equity assets more costly and less attractive.
Banks could look to dispose of up to $30 billion of private equity holdings on the so-called "secondary" market, nearly three times the approximately $10 billion they sold last year, according to estimates from industry specialists.
"Banks have various issues to deal with of varying scale and sooner or later will have to get around to dealing with unlisted, illiquid assets," said Elly Livingstone, partner at private equity investor Pantheon.
He believes 2012 could be another record year for deals, with banks attempting to sell $25 to $30 billion of assets.
"The market for 2012 will still be driven by the banks who will put a huge amount of paper up for sale," said Vincent Gombault, managing director fund of funds at Axa Private Equity.
He expects $40-50 billion of assets will be put up for sale and that banks could account for around half the number.
Assets range from direct investments made by teams of in-house private equity specialists to large swathes of passive positions in large cap buyout funds.
"Quite a few of the positions banks own were taken to generate relationships for the lending business," said Triago's Drean. "Most banks would agree that it hasn't turned out to be that effective because all banks were effectively invested in the same funds."
For those that have completed recent fundraisings and pulled in capital from banks, it's an eclectic mix and not necessarily the "relationship" banks that provide financing for their deals.
For example, late last year Swedish firm EQT received investments from Japan's Norinchukin , Industrial Bank of Kuwait and Scotiabank Private Equity, as well as local supporter Nordea (NDA.ST).
TO SELL OR NOT TO SELL
Specialist buyers like Axa Private Equity, Coller, HarbourVest and Pantheon are ready to step in to buy assets and commit to back any future deals, so at least the sale by banks of existing investments is not problematic for the buyout firms.
But selling will not be painless for the banks because the capital available to buy the asset is significantly less than what they have to sell.
Globally, the specialist funds can muster only $30-40 billion, according to Axa Private Equity's Gombault, which with modest leverage and co-investment from large investors can expand to $65 billion -- to be deployed over three or four years. That is well short of the $110 billion banks have on their books.
This, and the fact that banks baulk at taking less than 80 percent of face value, will keep a floor under prices and mean that only a proportion of assets brought to market will sell.
But even discounts don't necessarily mean losses in the long term. On average, investors made 1.35 times their investments in secondary market sales in the five years to end 2011, according to calculations by Triago.
"The arbitrage between selling and not selling is a very simple calculation. Is it better to keep the asset even if it costs capital, or to take a loss and sell off the portfolio? It's very simple," Axa's Gombault said.
So the relationships might have cooled, but banks will remain investors in private equity firms for some years to come.
(Reporting by Simon Meads; Editing by Andrew Callus)
Source REUTERS
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