Monday, June 19, 2006

Banks Will Have To Reinvent Lending Soon
The Rise & Rise Of Private Equity and Pension Funds

As a principal funding source, banks are always the first on call list on CFOs rolodex. However, the trend is that more and more companies are relying on private equity funding (replacing banks) or pension funds, especially for meatier, riskier, more complicated financing deals. A lot of private equity firms are funded by pension funds, and herein lies the new equation to funding. Private equity firms also bring to the table equity participation (with or withour senior management / owner) and flexibility in terms and conditions. Banks generally look at plain vanilla stuff, anything more complicated than that, they would tend to shy away from anything deviating from the rule book.

In Europe, pension funds have overtaken banks as the main source of capital for European private equity industry. Pension funds contributed a quarter of the US$90 billion funds raised in 2005, up 19% market share 2004. While banks collectively funded only 17.6%. Pension funds have been slow in diversifying their portfolio, but thanks to the superior performance of the respectable endowment funds of Yale University (which invested liberally in hedge funds and private equity firms), more and more pension funds are open to more aggressive diversification.

It used to be that any big M&A deals cannot move unless a major line of funding is obtained from one or two of the bigger banks. Banks will now find themselves shut out from more and more M&A deals with the rise of big private equity firms. These firms can offer many options where the banks will not even dare to consider - equity participation; flexible repayment; equity participation for senior management; taking companies private and allowing flexibility to realign or sell business units without needing bank's approval at every juncture; debt covertability into equity; etc...

If you look at the bigger banks in US, they are already smart enough to buy into or have a huge private equity fund unit. Whereas the banks in Asia are still happy going with the flow. The lack of foresight here is quite severe. The number of huge US/European private equity (and longer term hedge funds) that have set up shop in Asia over the last 12 months have been considerable. Even KKR and Carlyle Group now have an established presence, alongside the stalking Goldman Sachs Private Equity. I still have not heard whispers on how Asian banks are planning to counter the probable erosion of banks' lending activity. The worse thing is probably most are not even aware of the looming threat .... (threat, what threat??!!).

1 comment:

market_observer said...

I believe CIMB have at least 3 funds; the joint-venture with Navis, the Mezzanine fund and the Pre-IPO fund. However the amount of capactiy (to invest) is still nowhere near the american pe funds. In anycase, CIMB, having taken over BCB, will probably utilise more of BCB's (debt) balance sheet.

Interestingly, the depature of the CEO of SBB (given the take-over of SBB by CIMB) may actually lead to more pe investments as he is actually quite a well-known angel investor