BERLIN – Private equity is circling Europe’s banks.
Faced with bloated balance sheets and efforts to cut back on lending, the Continent’s largest financial institutions offer enticing opportunities for leading firms like Apollo Global Management and Kohlberg Kravis Roberts.
For some, the chance to pick up loan portfolios, particularly from nationalized firms like Royal Bank of Scotland, at a hefty discount is tantalizing. Other are enticed by the ability to provide financing for strapped companies that can’t get credit from traditional lenders.
There’s just one catch: European banks aren’t playing ball.
More than $1 trillion of cheap, short-term loans from the European Central Bank have given banks extra breathing room, allowing them to hold on to some troubled assets like defaulting real estate loans. Local politicians also have strong-armed industry giants to offer lending to companies in a bid to jump-start growth across Europe.
The limited deal flow, particularly for so-called distressed assets like consumer lending portfolios, contrasts with the high hopes that many private equity firms initially had about picking up assets on the cheap.
“The ratio of hype to substance about banks deleveraging their balance sheets has been exceptionally high,” Nathaniel M. Zilkha, the global co-head of special situations investing at K.K.R., told a packed conference room at the Super Return private equity conference in Berlin on Tuesday. “Sitting outside the offices of Royal Bank of Scotland waiting for the flood of assets is a difficult strategy.”
Still, some deals are getting done. Banks are pulling back from international markets where they have small operations, and European governments that bailed out local lenders are forcing asset sales to wind down bad investments.
Last year, Apollo Global Management, for example, picked up consumer lending businesses in Ireland and Spain from Bank of America, as the American bank pulled back from the struggling European economies. K.K.R. also pocketed an Australian loan portfolio from the Lloyds Banking Group of Britain, which is 42 percent owned by local taxpayers after being bailed out during the financial crisis.
“Some banks have to sell,” said David Abrams, the head of European nonperforming loan investments at Apollo. Others “want to sell to get out of noncore markets.”
Private equity firms, though, are still waiting for the long-awaited fire sale by European banks.
Mr. Abrams of Apollo said the combined balance sheet of the Continent’s financial institutions is still more than $60 trillion, compared with around $12 trillion for United States banks.
With limited economic growth projected for the foreseeable future in Europe, private equity firms are still hoping that banks will be forced to increase their asset sales, especially ahead of new capital requirements that will make it more costly to hold on to delinquent loans.
Firms also are looking to muscle in on European banks’ monopoly in the lending market.
Since the downturn, many institutions have pulled back from financing companies and buyouts as they look to reduce their exposure to risk. They also are changing their business models from holding large debt portfolios on their balance sheets to reducing the size of the financing and looking to shed the investments to other investors.
“Banks are massively changing their commitments” to new lending, said Robin Doumar, managing partner at Park Square Capital, one of the private equity firms looking to fill the financing void.
The strategy for private equity includes offering debt financing for buyouts, as well as complex financing options like so-called mezzanine loans.
While banks are expected to remain important lenders for European deals, analysts expect private equity lenders to increasingly take a larger share of the business.
“Banks are not out of business, they are just doing it in a smaller way,” said Blair Jacobson, a managing director in the private debt group of Ares Management, a firm that offers financing options to companies. “The market opportunity for what we are doing is immense.”
Article source: http://dealbook.nytimes.com/2013/02/26/private-equity-eyes-european-bank-assets/?partner=rss&emc=rss