Private Equity Still Eyes Financials After iShares

LONDON (Reuters) – Private equity firms remain confident of pushing through vendor finance-backed financial sector deals, in spite of CVC Capital Partners’ failed 3 billion pound bid for part of British bank Barclays.

The planned sale of iShares, Barclays’ (BARC.L) exchange-traded fund unit, signaled a high-point for private equity in an otherwise moribund LBO market until the $13.5 billion sale of the whole of Barclays Global Investors (BGI) scuppered CVC’s best laid plans.

While the deal proved a bridge too far for the European firm, however, private equity players expect new targets to emerge across the financial services industry.

“There is no shortage of banks right the way across the world who are considering what’s core and what’s non-core and how they can secure the amount of capital they need,” said James Fraser, head of the financial services team at European buyout firm Permira PERM.UL.

LLoyds Banking Group (LLOY.L) has reportedly seen private equity interest in its Insight Investments arm, while RBS (RBS.L) has highlighted a number of non-core assets, including its asset management division.

As with BGI, private equity firms will face stiff competition from trade buyers who have scale for larger deals and can extract synergies from combining operations.

“Whether they go to trade buyers or private equity will all depend on the nature and size of the asset, but there will certainly be more deal flow and some of the deals will get done by private equity,” said Jacques Callaghan, managing director at advisory firm Hawkpoint.


What makes these deals attractive and even possible for private equity is the potential for the banks themselves to stump up the money to finance the transaction.

“Deals with financial institutions address the issue of finding new LBO financing as they are often prepared to provide vendor financing,” said Fred Wakeman, managing partner at international private equity house Advent International.

Barclays was ready to lend CVC up to 70 percent of the 3 billion pound iShares price tag.

While prospective buyers had initially hoped to acquire assets for fire sale prices, that has not been the case as governments have stepped in to support financial institutions.

“They are being very disciplined about the way they sell their businesses and the price which they accept — those that have taken government money recognize they have to do the right thing by the tax payers,” said James Brocklebank, head of the financial services team at Advent.

As a result, banks are frequently looking to retain a stake in order to avoid future criticism, a model used by Barclays in the BGI deal and by Fifth Third Bancorp in its payment processing deal with Advent.

A retained stake also allows private equity buyers access to high profile transactions by bridging buyer and seller price expectations and letting the seller to capture some of the future upside, said Callaghan.

By Simon Meads
(Editing by Joel Dimmock and Simon Jessop)