This year, two governments in emerging Europe finally managed to find buyers for failed, state-owned banks.
In April, the Latvian government sold Citadele Bank to an investment consortium led by Ripplewood Advisors. Two months later, Slovenian policymakers announced that US private equity firm Apollo Global Management had won the bidding for Nova KBM.
Superficially, the deals have much in common. Both banks are sizeable in their home markets. Citadele, which was carved out of Parex Banka after the lender went spectacularly bust in 2008 and had to be renationalized, is the largest locally owned bank in Latvia and number three in terms of active customers. Nova KBM is second only to NLB in Slovenia.
Both are located in eurozone countries with decent growth forecasts and good recovery stories. Yet as banking markets both Latvia and Slovenia are relatively tiny, making them much less attractive to strategic investors in an era of squeezed margins. As a result, both have ended up in the hands of US financial investors.
There is, however, a crucial difference between the two buyers. Apollo is a traditional private equity firm, whereas Ripplewood abandoned the private equity model after the financial crisis and reinvented itself as an investment club for qualified, high net worth individuals.
The arguments against private equity ownership of banks have been well rehearsed but, given the increasing popularity of the model in emerging Europe, bear revisiting.
Private equity firms may be extremely well qualified to restructure and revitalize underperforming companies, financial or otherwise, but the balance sheet support that they can provide to banks will inevitably be limited. They are also more inclined to walk away if things go wrong rather than throw good money after bad.
By allowing funds to take over strategically important lenders, governments thus effectively give up any upside while leaving themselves on the hook for the downside – as Germany found out this year, when it was forced to resume responsibility for disaster-prone DuesselHyp, five years after the bank was sold to Lone Star.
The most obvious way to obviate this risk, in the absence of strategic investors, is to privatize via the public markets. If a listed bank runs into trouble and needs recapitalizing, it has access to a huge pool of potential investors. It may not be cheap, but in the long run a public offering will likely be much less costly than renationalization.
It is therefore extremely encouraging that one of the first acts of Ripplewood’s consortium as owners of Citadele has been to announce plans to raise a substantial chunk of new growth capital via an IPO in London and Riga. This speaks to a flexible business model, well suited to the rough and tumble of emerging markets banking.
By contrast, in allowing Apollo to acquire such a big chunk of their notoriously opaque banking sector, the Slovenian authorities have taken a hopefully calculated but certainly not inconsiderable risk. The fund is reportedly bidding for several other Slovenian banks, including the subsidiaries of Sberbank and Raiffeisen. Policymakers should think very carefully before approving any further acquisitions.