Private equity sponsors have been hamstrung by a lack of willing vendors across most sectors in Europe. This has been both a major impediment to deal flow and a frustration as potential deals, such as the auction of Vitalia, fail to deliver despite having run almost the full sale process.
The financial institution sector, on other hand, has no shortage of keen sellers. However, bank deals are difficult and unattractive to leverage up as most are already highly levered and all are regulated, making them awkward prospects as financed deals.
In fact there is little or no debt financing available for these type of transactions, but after years of bumper fund raisings, sponsors are capital-rich and target-poor. A year into the credit crunch a whole range of banks are capital-impaired, making them happy to partner with private equity minority shareholders or to dispose of non-core assets.
Last week Lone Star acquired 90.8% of German lender IKB, a classic capital-impaired asset. Losses on US subprime investments meant IKB needed to be bailed out by Germany’s state-owned KfW at a cost of more than €8bn, a process which saw KfW increase its stake in IKB from 45% to over 90% and then organise a sale.
Apax Partners is in talks to buy Belgian insurer KBC’s 30.6% stake in Slovakian bank NLB, an asset originally also targeted by Blackstone. KBC has been seeking to sell the stake since April as it is understood to have become frustrated by the lack of control conferred by the minority stake. The Slovakian state owns 33% of the bank.
Bank deals are not entirely new. In 2006, JC Flowers acquired a stake of more than 25% in HSH Nordbank, and earlier this year was forced to increase its equity investment to maintain its holding. The private equity group is also part of a consortium that owns Dutch bank NIBC and bought a minority stake in Germany’s Hypo Real Estate in June.
In the right circumstances it has even been possible to find debt to back bids.
In the first half of last year a consortium of private equity firm Cerberus, insurance group Generali, German mortgage bank and bank assurance group Wuestenrot & Wuerttembergische (W&W) and the Austrian postal services agreed a deal to pay €3.2bn to buy troubled Austrian financial services group Bawag.
The deal included €600m used to shore up the bank’s balance sheet. At the time the acquirers were able to tap the debt market, with Lehman Brothers arranging a €1.9bn warranted holdco acquisition financing facility to support the deal.
The financing put in place was tailored to the assets being acquired and feasible to a great extent because of the resilience of Bawag’s retail depositor base, which had held up remarkably well despite a long-running crisis at the bank.
Even so the deal relied on an investor group unusually comfortable with risk at a point when the market in general had become largely risk unaware, a point long since passed.
When Northern Rock’s North of England depositor base moved to withdraw their savings in the early stage of that bank’s funding crisis it spelled the end of any financing package that would rely on the inertia of depositors to protect balance sheets.
Northern Rock’s depositors shared many characteristics with Bawag’s base of mature Austrian savers, but behaved entirely differently by rapidly withdrawing deposits until the state stepped in with guarantees, and ultimately nationalised the bank.
Geography might go some way to explain the shift in depositor behaviour, but depositors were also responding to the re-emergence of risk awareness and risk aversion as a major factor in popular perception post the credit crunch, something that investors and lenders in retail banks must factor in to calculations.
Valuing banking assets has always been problematic and the lack of transparency around what assets institutions own and how to value them has only exacerbated this difficulty.
While private equity firms are prepared to take a view that bank valuations have slipped too low and hope to reap the equity rewards of well-timed investments, there is no incentive for non-equity holders to support such high-risk plays, at a time when the question is not whether banks will fail, but how many will go under?