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"Now private equity is looking to reinvent itself again in several ways, including trying to invest in financial companies"
Richard Addlestone, Walkers |
"Sovereign wealth funds and pension funds are putting pressure on private equity firms to deploy capital, but funds have found it hard to find places to park money that will produce returns," says Richard Addlestone, a partner at law firm Walkers. One sector increasingly of interest is banks and other financial institutions, but TPG’s experience with its investment in Washington Mutual has made some funds nervous. TPG injected $1.3 billion into WaMu, which might all have been lost following the seizure of the regional bank by the US government.
Addlestone says some confidence was restored after the US bail-out package but private equity firms will most likely structure investments differently in order to take advantage of the opportunities available in financials. "The private equity industry is very adaptable," he says. "We saw that when the credit crisis hit and cheap debt ended. Funds adapted – they went back to their roots and tried to maximize value out of their existing companies. Now private equity is looking to reinvent itself again in several ways, including trying to invest in financial companies." Addlestone says he believes that over the next two quarters private equity firms will continue to look at taking minority stakes in financial institutions that require capital, and then provide management expertise in order to turn companies around. "They will need to choose investments carefully, but taking equity or mezzanine stakes in these companies could prove rewarding," says Addlestone.
Craig Lilly, an attorney with law firm Squire, Sanders and Dempsey, says the loosening of rules by the Federal Reserve last month has also encouraged private equity firms to invest in financials. The Fed allowed buyout firms to purchase up to 33% of the equity of banks and financial institutions, 15% of which can be in voting common stock.
The commitments
Private equity funds worldwide have an estimated $500 billion in capital waiting to be deployed, although lawyers point out that not all that capital will end up coming through. "As investors lose money or need to hang on to cash, private equity funds are finding that commitments are not certain. Some firms are actively calling around their investors and checking they are still good for their commitments."
In addition to altering structures for investments, private equity firms will also pick up traditional investment banking services, believes Lilly. "There is a considerable amount of talent that has been freed up from the investment banks and it is only a matter of time before private equity firms expand into investment banking territory such as M&A advisory, which we have already seen from the likes of Blackstone and KKR, but also advising on restructurings, placement services and other securities offerings."