In late June The Carlyle Group's Olivier Sarkozy and Randal Quarles wrote an op-ed in The Wall Street Journal urging regulators to alter restrictions that disincentivize private equity investment in ailing financial services firms. One month later, comments from representatives of the US Federal Reserve suggest that these suggestions might soon become reality.
“With more than $400 billion in available funds, private equity represents a large pool of untapped capital for the financial-services industry,” Sarkozy and Quarles wrote. “Yet an array of regulations and administrative interpretations limits private equity's ownership and influence in regulated depository institutions.”
The two cited laws established by the Bank Holding Act that prohibit an entity that controls commercial firms from owning more than 25 percent of the voting stock of a banking company, as well as the “source of strength” doctrine that would expose the controlling entity to potentially unlimited losses.
But Fed chairman Ben Bernanke recently told the House Financial Services Committee that the Fed is examining these rules, and may clarify what constitutes a controlling interest in a bank in order to clear the way for private equity.
“Private equity is a very good source of capital,” Bernanke said at the hearing.
Treasury Secretary Henry Paulson said he also supported the idea of banks being open to private equity capital.
Robert Ohrenstein, a partner at KPMG who is responsible for the firm's private equity transaction services division, said he welcomes the news.
“Some of the larger private equity funds would see a relaxing of restrictions as a two-fold opportunity to take advantage of undervalued banking stocks, whilst also offering a new approach to the banking business model and operating structure,” he said. “Private equity investment in the banking sector could herald a much needed injection of new ideas and source of capital – it is not a universal cure, but a fresh perspective, management style and way of operating that could be key as financial institutions look for a recovery in fortunes.”
But he warned that a shift in the Federal Reserve's policies may not be enough to entice some investors into the sector.
“Even if the Fed progresses its ideas, many private equity companies will still tread with caution due to a historical avoidance of the sector, a shortage of individuals with the relevant core competencies, regulatory concerns and, importantly, restrictions on leverage.”
S&P to rate debt of Euro portfolio companies
A client alert from the Equus Group, the UK-based private equity communications consultancy, warns that under new changes to Standard & Poor's rating system S&P will, from December, disclose information relating to the performance of European companies receiving private equity investment. Under the new rules, S&P will give a public rating for buyouts with debt of more than €1 billion. Credit estimates are currently made for individual paying investors. The new system makes public S&P's rating, its rationale and also what the company's prospects are should it default. Equus explains that the move is thought to free up liquidity and improve confidence in the leveraged loan market and respondents to S&P's consultation process prior to the changes being made have said that improving liquidity in the market was crucial. The firm adds, “The fear for private equity groups is that this could be the thin end of the wedge and in time more information will be finding its way into the public arena and eventually smaller deals may also be targeted. Private equity might find itself becoming not so private.”
PEC unveils new web resources
The Private Equity Council (PEC), the Washington, DC-based lobbying group for the private equity industry, announced new elements on its website. The three new resources for visitors of the site are: a white paper concerning the credit crunch, an industry fact sheet, and new portfolio company case studies. The white paper, “Demystifying the Credit Crunch: A Primer and Glossary,” is authored by the PEC and consulting firm Arthur D. Little. It is intended to help members of the news media and others better understand what led to the current credit crisis and clarify its nomenclature. The fact sheet, “Private Equity: By the Numbers,” scopes the industry and its economic impact, providing data points about private equity investment in the US. For example, according to Private Equity Intelligence, private equity firms worldwide are responsible for $234 billion of direct equity investments in companies in 2007. Finally, the new case studies were developed by the PEC to offer in-depth analyses of how private equity investment has strengthened high profile American companies – including Burger King – as well as lesser known enterprises that are outperforming their sector peers – such as Axle Tech International, a drive train manufacturing company based in Michigan.
Palatium nabs Accord CFO
Private equity real estate investment manager Palatium has hired former Accord chief financial officer Adam Shutkever as a managing director. Shutkever was CFO of Accord, a support services group, from 2002 to 2007 and one of the firm's three executive directors. He led the sale of Accord to 3i/Enterprise at a valuation in excess of 23x EBITDA. Prior to this Adam was a managing director at Deutsche Bank where he specialized in mergers and acquisitions and equity capital markets business in the hotel, leisure and entertainment sectors. “To have attracted someone of Adam's caliber as managing director shows that very real opportunities in the real estate and real estate debt industry, even, or perhaps especially, during these challenging times,” said joint chief executive Neil Lawson-Maym. “Adam's appointment means we now have a team with the experience and skills to create and manage the funds we are working on for our investors.”