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Uncertain future for more PE teams

The long-running speculation that some of the US and European investment banks would have to buy or gradually lose their waning ability to compete in the corporate finance arena with US bulge-bracket banks Goldman Sachs, Morgan Stanley Dean Witter and Merrill Lynch has resulted in merger mania among the second tier during the last month. Credit Suisse First Boston has opted to acquire Donaldson Lufkin & Jenrette from Axa, Chase Manhattan is acquiring JP Morgan and Dresdner Kleinwort Benson wants Wasserstein Perella.

As always, there will be winners and losers among the private equity operations of these institutions, the prospect of which is no doubt warming the hearts of recruitment consultants and headhunters that operate in the private equity field. Of late the recruitment consultants have been frustrated by having plenty of posts to fill but not enough suitably venture capital qualified applicants to fill them.

First, take the case of Credit Suisse First Boston. Credit Suisse First Boston has not had to deal with mega-merger integration issues since Credit Suisse bought First Boston towards the end of the 1980s. As it currently stands, Credit Suisse First Boston has a private equity operation, called Credit Suisse First Boston Private Equity (CSFB Private Equity), which in Europe operates out of London, Moscow and Zurich and, outside Europe, in Hong Kong, New York and Sao Paulo.

In Europe its typical fare is management buyout, management buy-in and expansion capital, with a minimum investment of GBP15 million required. Funds invested come both from its parent’s balance sheet and those of institutional investors. Its European activities are run by Richard Winckles, who is based in London and joined CSFB Private Equity following a 13-year stint at Schroder Ventures. Winckles is also co-head of CSFB Private Equity’s international division along with Frederick Smith, who is based in New York. The private equity business is regarded as a core business in the Credit Suisse grouping and the private equity arm has around $3.6 billion under management at present.

By comparison, Credit Suisse’s proposed acquisition target, the investment bank Donaldson Lufkin & Jenrette, has over $15 billion invested in private equity globally, of which around GBP600 million under active management falls within the remit of the European operation, DLJ Phoenix Private Equity. In Europe, two funds are currently running: DLJ Phoenix Private Equity Partners II and the Phoenix Development Capital Fund. Donaldson Lufkin & Jenrette bought the Phoenix group in 1997 and with that acquisition came a private equity fund management business dating from 1991 which had, prior to the acquisition in December 1996, closed its second fund on a total of GBP133 million. Martin Smith, who joined DLJ Phoenix Private Equity via the Phoenix acquisition, leads the European investment team.

A bulk of Donaldson Lufkin & Jenrette’s private equity interests, however, lies with the Sprout Group. In 1969, Sprout Group was set up in the US as an affiliate company of Donaldson Lufkin & Jenrette. It is currently investing from Sprout Capital VIII, which is a $860 million fund with one third of its capital raised from Sprout, Donaldson Lufkin & Jenrette and its affiliates. Sprout draws on Donaldson Lufkin & Jenrette resources and invests in the datacom and telecoms, e-commerce, services, healthcare technology, software and technology industries, with its target markets being the US and western Europe. The Sprout team is run out of New York, with some of its staff based in Menlo Park.

In addition, DLJ Merchant Banking Partners has committed capital of $3 billion and targets the purchase of equity and mezzanine securities in leveraged transactions and other similar types of transactions.

The second case is Chase Manhattan’s acquisition of JP Morgan. Chase Manhattan has been under pressure to find an appropriate partner for some time and in 1998 was linked to Merrill Lynch in press reports.

As for Chase Manhattan’s private equity capabilities, these are housed in Chase Capital Partners, which is an affiliate business.

In Europe, Chase Capital Partners operates in the management buyout, management buy-in and expansion capital space, looking to make minimum equity investments of GBP15 million. The European team invests off its parent’s balance sheet and is run by partner Lindsay Stuart, whose pre-Chase Capital Partners career was spent with Prudential Venture Managers and Cinven. In the US head office of Chase Capital Partners, Jeffrey Walker is the general managing partner. The global operation of Chase Capital Partners currently manages a $20 billion portfolio including direct equity and mezzanine investments, fund investments and its buy-side asset management groups.

JP Morgan on the other hand has around $4 billion under management through JP Morgan Capital and expects to invest at least a further $1 billion this year on behalf of JP Morgan, its employees and institutional investors. Of the figure invested so far, half of that has been placed in companies outside the US. Tom Reagan and Pierre Dupont are managing directors of JP Morgan Capital’s European office in London, which has invested $150 million in the three years since it was established.

The third instance is Dresdner Kleinwort Benson’s acquisition of Wasserstein Perella. Dresdner bought US merchant bank Kleinwort Benson in the middle of 1995 and by 1998 was said in press reports to be interested in buying Painewebber (which UBS eventually snapped up in July this year). Now that Dresdner Kleinwort Benson is to buy Wasserstein Perella it will gain a decent foothold in the US, seen as necessary to enable it to compete with its bulge-bracket rivals. Dresdner Kleinwort Benson has long been seeking a buyer, having aborted merger talks with Commerzbank and seen its merger talks with Deutsche Bank collapse earlier this year.

Dresdner Kleinwort Benson Private Equity, which has s3 billion under management worldwide, was recently designated a separate business line by the bank, underlining its increasing importance within the group, under the overall leadership of Christopher Wright. Within Europe, the UK and Ireland team is headed by managing directors Richard Green and Andrew Hartley, Emyr Hughes is the director responsible for the Germany office, Juan Dmaz-Laviada Marturet is the partner and general manager in charge of the Spanish office, Enrico Ricotta is the chairman and chief executive officer in Italy, and central and eastern Europe is managed by Janusz Heath.

By contrast Wasserstein Perella’s private equity business is limited to the US and is concentrated in an operating unit of Wasserstein Perella called Wasserstein Perella Ventures. This identifies and invests in early stage firms whose business strategy can be augmented by the firm’s M&A and IPO practices. Venture investments are made through the $135 million Wasserstein Adelson Fund which has a primary focus in the areas of media, Internet applications, wired and wireless Internet infrastructure and healthcare. Amounts invested are in the range of $2 million to $9 million with Wasserstein Perella Ventures participating as sole, lead or co-investor.