And with credit-crunch-related write-downs reported to be approaching US$150bn, it appears the banks are combing all aspects of their businesses for opportunities to turn illiquid assets into cash. Angela Sormani reports.
In addition, draw-downs from LPs have increased but distributions are not matching the draw-downs and if anything have come to a standstill. Portfolios are therefore swelling with cash invested but have yet to show the returns for it and it is also for this reason that allocations from the banks to the asset class are decreasing.
Andrew Sealey of placement agent and secondary advisory firm
Marleen Groen of secondaries investor
There are no such disposals to be spoken of officially as yet and “no comment” seems to be the most likely response to any questioning of these banks’ future plans for their private equity holdings.
Rumoured to be leading the shakeout is
Other players under the watchful eye of secondary market participants include Bear Stearns and Merrill Lynch, but it is also likely that the private equity holdings at such banks may remain where they are for the time being as many are housed in dedicated alternative investment divisions, which are more likely to hold on to the assets.
From the perspective of the banks, the pressure on their capital is quite clear – some have been really badly hit; mostly the US banks – and this may be driving them to release capital wherever they can and if there is sufficient capital within their private equity portfolios then we might well see some hefty disposals of these assets.
An additional pressure on the banks is the implementation of the Basel II Accord, which is currently underway and is currently increasing the capital costs of banks by around two to three times. Although banks that have managed to deliver healthy private equity returns may be more willing to shoulder the extra capital adequacy levels the Basel II Accord entails, for banks that have endured major losses, this added pressure will add as a further deterrent. One alternative for banks in this scenario is to set up fund-of-funds businesses, which allows the managing bank to third-party funds in external private equity funds and collect fees and carry income, yet skirt the protective capital issues of on-balance sheet direct investing.
Taking into account the strain many of the banks are under, some might say euro-focused banks such as
A consortium led by
But this is all part of the private equity cycle – the banks constantly seem to be getting in and out of private equity and it looks like the same old story. Look at Deutsche Bank with its legacy of Morgan Grenfell private equity investments. Other commentators seem to suggest that secondary sales are essential for a healthy investment portfolio and if you’re not selling secondaries, having been active in the market for some time, then you’re not managing your portfolio actively or effectively enough.
Andrew Sealey confirms: “A major development is the establishment of institutions using the secondary market as a portfolio management tool. This is something we will be seeing more and more of.”
Undoubtedly banks and investment banks are important players in the private equity asset class and will continue to be so. While in many cases banks will possess and sponsor their own private equity operations, a large number also act as a limited partner in private equity funds. According to Private Equity Intelligence, of the overall limited partner universe, banks account for 10% of the total. Significantly, banks contributed an average of 20% of the capital committed to funds that reached a final close in 2006, making them the biggest contributors to individual funds alongside public pension funds.
The contribution made to the private equity industry by banks has been considerable. The average current allocation to private equity of banks is 12.7%, which, although smaller than the average allocations of asset managers and family offices/foundations with averages of 17.2% and 14.8% respectively, is more significant when taking into consideration that the average total assets of banks is far larger than either of the other groups.
All the above bodes for a busy year for banks selling private equity holdings and the secondaries market certainly has the capital to invest. The number of players targeting the secondaries space has increased – there are the ongoing specialist players, the fund-of-funds, the institutional investors and the non-traditional/structured vehicles and hedge funds and it has become a US$20bn-a-year industry.
Stephan Schäli, partner and head of the private alternative investment strategies department at