Anyone with lingering doubts about private equity’s pivotal role in the financial markets should take a look at the NIB Capital auction. Two private equity bidders have offered nearly €2bn apiece for the Dutch bank, squaring up against Fortis and a joint bid from a unit of General Electric and Lehman. The bids from Cerberus Capital and a fund led by former Goldman Sachs executive Christopher Flowers are in the driving seat, comfortably outstripping the €1.6bn offer from Fortis.
NIB has been put up for sale by pension funds ABP and PGGM. If Cerberus wins, the scale of the takeover would rank as small change within the global financial system. But the implications could dwarf the dollar value of the deal.
In a reversal of the usual relationship, a successful takeover by Cerberus would put the independent merchant bank and its global distribution network under private equity control. Cerberus is a fairly large fish in private equity, while NIB is an investment banking minnow, and deal-clinching synergies in auction scenarios are unlikely to be frequent because of that imbalance. But this situation raises the intriguing subject of private equity’s potential for involvement in investment banking on a grander scale.
If Cerberus can entertain a circa €2bn bid for NIB Capital on its own, think what four or five of the recent/pending US$5bn–$10bn private equity funds could attempt if they clubbed together. However unlikely or fantastic that sounds, such a move is not entirely without precedent or logic. Alternative asset giant Blackstone was formed from an M&A advisory boutique, and the recent series of captive spin-outs means that buyout firms are already a major influence on investment banks. Why not formalise the arrangement?
There is no doubting private equity’s appetite for China or India. Every week there seems to another firm setting up an office in one or both of those markets. Carlyle is the latest example, establishing its third office in Beijing last week.
For some, the scale of this focus on China is premature, but arguably those international buyout firms just setting up shop might already be too late. The most recent arrivals face an unprecedented level of competition from local firms and the more established overseas players.
Those rivals have already snapped up the very best investments and are increasing their efforts to lock in profits. Morgan Stanley’s private equity arm conducted an IPO for China Mengniu Dairy, while Goldman’s private equity operation made good money investing in online gaming companies that have since listed on Nasdaq.
The dreadful state of the Chinese A-share market might provide a respite, however. The current moratorium on new public equity deals – while the authorities sort out the non-tradable state share issue – is a boon for the private equity industry as a whole. Private equity could emerge as the only source of funding for many growing Chinese companies, thereby sustaining, and then profiting from, the boom. Perhaps there is room for a few more after all.