Making a break for it

Captive or semi-captive private equity houses continue the march to independence. September brings news that Gresham is the latest firm to break free of its parent, in this case Zurich Financial Services (see NEWS this issue). Last month HSBC Private Equity was reported to have reached an agreement with the bank, although no timetable for the separation has been announced. Irish firm ICC Venture Capital could be the next to join the list as Bank of Scotland, which bought ICC Bank last year, has confirmed buyout talks are in progress. Also on the block is an invoice discounting joint venture with NMB Heller.

The move towards independence is often triggered by a change in ownership of the parent organisation, although increasingly other issues are coming into play. The current trend is a reversal of the situation private equity houses previously found themselves in, when they were attractive acquisition targets for banks looking to boost their private equity expertise. For example, ABN AMRO’s 1996 acquisition of Causeway to help establish private equity operations in the UK and Elderstreet joining the Dresdner Kleinwort Capital operation in 2001.

Some of these acquisitions, where integration was unsuccessful or another problem prevented the partnership from fulfilling expectations, are now resulting in the firm spinning-out again. With investment banks and other financial services companies feeling the worst of the current market squeeze the transaction flow is now far more likely to be in the opposite direction. Just as industrial corporations are refocusing on their core activities banks and insurance companies, no doubt influenced by what compared to bubble-era figures seem meagre returns, are reconsidering the role of their private equity subsidiaries, particularly in light of their capital adequacy ratios.

Independence also brings benefits for the private equity group and its management team. General partners expect it to boost fund raising. Following an amicable buyout or spin-off newly independent firms often receive a commitment from their former parent and third party investors are perceived to prefer independent funds to semi-captives where the parent is sometimes thought to be calling the shots. Investors’ and general partners’ gripes can include the parent organisation’s lack of understanding of private equity and being the victim of a constantly shifting strategy. While going it alone doubtless has its risks, GPs can expect to see an increased share of the profits of their labours.

There is frequently speculation about the future of captives and certainly not all buyouts or spinouts launched by private equity management teams have been successful. The most notable failure was Morgan Grenfell Private Equity’s bid for freedom, which collapsed after a protracted battle last year resulted in the firm being incorporated into Deutsche Bank’s private equity arm, DB Capital. UBS Capital was equally unsuccessful, although for different reasons. Also last year Baring Private Equity Partners was rumoured to be working on a plan to buy itself out from ING, again nothing came of it. The table overleaf lists some of the private equity firms that have gained their independence from larger organisations.