Financial News: Banks Seize EUR50B Of Private Equity-Backed Cos

  By Toby Lewis    Of FINANCIAL NEWS  

Banks are finally getting tough with private equity. They have taken control of almost EUR50 billion ($65 billion) of private equity-backed companies in Europe since the beginning of 2009 as a result of those companies defaulting on their debt.

This activist approach is a reversal from the times when banks were more inclined to let financial sponsors off the hook, than play hardball with them, according to bankers working in restructuring. But it has also raised questions as to whether the banks are equipped to make a profit from owning these companies or whether they will face further losses.

The banks are telling private equity firms to inject more money into troubled companies, or risk losing control.

Derek Sach, head of the global restructuring group at Royal Bank of Scotland, said: "If private equity wants to stay in the game, they have to be willing to invest more equity. Otherwise we are happy to go ahead without them."

In the previous downturn in the late 1980s and early 1990s, lending banks typically took control of private equity-backed companies only to sell them quickly on the cheap, often back to private equity. This time they are intent on reaping any gains for themselves.

Sach said: "Banks already have exposure, and so we are making the best of a bad situation. Banks did give up value in the 1990s and they are not disposed to do so this time."

Private equity-backed companies, with debt totalling EUR32 billion, have been in part or wholly acquired by lenders following a restructuring since the beginning of 2009, according to analysis by Financial News of data from Debtwire, a specialist research firm. As typical private equity deals are generally two thirds funded by debt, the value of these companies when they were acquired is estimated to be about EUR48 billion.

Big private equity-backed European companies that have been taken over by banks include U.K. care homes group Four Seasons, luggage company Samsonite and Spanish bakery group Panrico. Other companies have fallen into the hands of distressed debt investors such as gambling company Gala Coral and French building materials company Monier.

In response, banks have added staff to deal with their growing portfolios. Royal Bank of Scotland Group PLC (RBS), which owns Four Seasons and Samsonite, has roughly tripled the executives in its restructuring unit, which manages the portfolio. Lloyds Banking Group (LYG) has moved Bank of Scotland leveraged finance head Iain Purves to run the division that oversees problem private equity deals.

However, some advisers are warning banks may be straying too far from their expertise in taking control of companies. Francis Bridgeman, a partner at U.K. law firm Macfarlanes, said: "Banks are not like private equity houses in terms of managing businesses. If you look at their role two and a half years ago, a lot of banks were not managing any kind of sizeable equity investment. They were not set up to get their hands dirty in any way."

One banker dismissed the idea that banks did not have the skill set to run companies day-to-day, saying it was "tittle-tattle put about by private equity players, who think they should be able to buy our stakes for a nominal sum".

Some believe that the trend to take stakes in companies could ultimately lead to more losses for the banks. David Lovett, a managing director at advisory firm AlixPartners, said he would not be surprised if many of the assets transferred to bank portfolios resulted in substantial losses.

He said: "They are not able or prepared to sell them to private equity guys, which could leave little prospect of recovery. They may end up being a bit more like a graveyard than a rehabilitation ward."

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