Banking Divergence

Last month, BNP Paribas quietly spun out its last remaining private equity group. This one has renamed itself Shore Points Capital, and focuses on acquisitions of mid-market manufacturing, distribution and services companies.

Many such spinouts result in the former parent bank taking a limited partner stake in the first independent fund, plus retaining its interest in the existing portfolio. This one, however, was more like a secondary asset purchase, with a large secondary/fund-of-funds shop backing an acquisition of most existing portfolio companies, plus providing capital for future deals (nope, I don’t know which one). BNP Paribas is now out of the direct private equity market, after having previously spun out PAI Partners and the Banexi funds.

I share this with you not so much for the scoop-aliciousness of it (Mmmm… banky), but more because it highlights a growing divergence in the way that financial institutions are treating internal private equity sponsors.

Two years ago, it seemed that almost everyone was moving in the same direction: Away. JPMorgan Chase, Morgan Stanley, Deutsche, Mellon, etc. all began spinning out – or killing off – internal private equity programs. Goldman Sachs and Citigroup were the stubborn anchors, while Credit Suisse only kept its in-house program after proving unable to spin it out. I made special note that Key Bank was launching an in-house VC program to compliment and existing PE group, but now both are securing third-party capital for new funds.

Today, however, you’ve got two distinct camps: Those who continue to move away like BNP Paribas, and those like Morgan Stanley that are coming back into the fold. One also could argue that there is a third wave, whereby groups like Blackstone actually are transforming themselves into I-banks – but that’s a richer topic than a Friday morning deserves.

Some folks believe that this divergence mostly breaks along the commercial bank vs. I-bank fault line, but I think it’s more than just classical risk biases. It’s also more than just senior management changes, although that clearly has played a role at places like BNP and Morgan Stanley.

I think it’s a question of understanding one’s core business. Banks need to diversify/grow their held assets, which is why commitments to private equity funds make perfect sense. They also need to grow their client base, which is partially why so many banks have fund placement units (plus it makes some nifty coin). But anything that could come into conflict with their core advisory clients is a sideline, and it’s the very reason that so many financial institutions began spinning out private equity teams. It should be more valuable to have KKR as a regular client, than to risk that by competing with KKR for a particular deal.

JPMorgan Chase understood this, and I hope it resists the urge to follow Morgan Stanley back into the direct investing market (the relatively-small One Equity Partners notwithstanding). It makes some money off of private equity via its limited partner commitments to its spinout funds (Panorama and CCMP Capital), and does not have to worry about client conflicts. BNP Paribas could say the same thing, if only it hadn’t opted against a recurring role with Shore Points. But perhaps – in this limited case – it’s better to be safe than sorry.