You cannot really fault the logic behind CSFB’s decision to spin out its buyouts business, DLJ Merchant Banking. About to raise its fourth fund at a targeted US$3.5bn, DLJ is simply too big a chick for the investment banking nest.
More importantly, it has been competing for assets with clients of the bank’s leveraged finance business at a time when private equity funds are highly liquid and competition for assets is fierce.
And that’s without factoring in CSFB’s unique need to catch up with its peers, stabilise earnings and drive growth in investment banking.
This a path that has already been walked by Deutsche Bank and Morgan Stanley, and could be a future course of action for JP Morgan and Goldman Sachs.
But you do have to wonder about the speed and timing of the spin-out.
The move has only been on the agenda formally for a few weeks. That makes rather curious the acrimonious departure of a group of DLJ professionals under former group head Larry Schloss. Schloss and Co. left to start their own fund under the Diamond Castle moniker, claiming in the press that conflict with other financial sponsor clients was detrimental to the business. CSFB let them walk away, and the newly spun out DLJ will have to compete with them on the fundraising trail.
Why did DLJ allow experienced staff to walk away, when everyone knows length of tenure and team experience are crucial factors when buyout firms spin out? Or was the creation of Diamond Castle a wake-up call for CSFB?
Lowering finance costs
The rumour, counter rumour and result on VNU World Directories has been one of the liveliest sagas in the European debt markets. The only thing that comes close is – Saga itself. Both deals laid to rest speculation about unrealistic aims on leverage, although together they have stretched the upper end of the buyouts market more than anything else this year.
Both Saga and VNU were helped along substantially by the fast-growing liquidity of Europe’s institutional loan market. While this investor base is still small in comparison with the US, both of these jumbo syndications were able to carve out 50% of their B and C term loans for fund investors. Oversubscriptions were also achieved ahead of close.
Sponsors should be vigilant as to how their debt arrangers manage this promising new liquidity pocket. It’s true that structures and norms in Europe reflect a market that is maturing and still dominated by a high degree of bank liquidity. But it is maturing very quickly, thanks to an influx of rational investors that are more or less willing to take the rough with the smooth.
While concepts like price talk and reverse flex still cause consternation among bank investors, institutional accounts are typically sanguine about these things.
Next time your arranger tells you how successful your deal has been, ask him if it has been successful enough to lower financing costs. Ask him if it’s ripe for a reverse flex.