Although I never thought I would say so, it would be preferable for us to nationalise our banking system than to allow a private equity consortium to own and control our major banks.
Private equity firms are probably the worst possible owners of a strategic asset like the banking system. If Mr Lenihan sanctions, at these distressed prices, a takeover of the Irish banking system by a private equity consortium, he will have used the guarantee of the Irish taxpayer to subsidise the profits of a tiny few speculators for two years.
Before he announced the guarantee he could have argued that the ownership of the banks has nothing to do with the State because they are private firms.
However, by using the sovereign name to prop up the system, he has changed the game completely. This is also acknowledged in the legislation because the minister now has a veto over who will ultimately buy the Irish banks.
He will also signal chaos in the banking system because the strategy of a private equity fund is to sell. The minute these lads buy an asset the first and only thing on their minds is how to get out of this asset, making the most money by selling to the highest bidder.
What is a private equity fund? A private equity fund is a highly leveraged takeover machine.
For the sake of simplicity, let’s say the investors put in $1bn. The private equity fund then borrows 10 times that so the fund with equity of $1bn now has $11bn to play with.
Crucially, private equity funds have a 10-year lifespan. The manager promises the investor at least 20pc back on his money, which becomes feasible when you see that the initial $1bn investment grows to $11bn with borrowing.
The fund manager spends the first four or five years raising money and buying assets and the next five or six years selling the investment. The manager takes a 1pc fee for managing the money but his real prize comes from the profits he makes when he sells everything and closes the fund after 10 years. He can’t take an extra penny out of the fund until everything is closed, the fund’s assets are re-sold and the profits are divvied up among the original investors and the fund manager after the banks are paid back their borrowings.
Therefore, it is clear that these private equity players are only in the game for the short-term and while they control the asset, they squeeze every last drop out of it in cost savings and the selling of what are called “non-crucial” assets. So, when it comes to selling the bank, the private equity fund ensures that at that particular time, the bank will be at its most profitable, irrespective of how many jobs are lost or how many branches are closed in the process.
The private equity manager doesn’t care who buys the asset, so once a private equity firm or consortium gets the controlling stake, the future of the Irish banking system is anyone’s guess.
Although this seems like a great business to be in, things have not being going well for our private equity friends of late. Many investors have been trying to get out of private equity funds in the past year because they realise that when prices are falling, the private equity managers are just as fallible as the rest of us.
Many of these “masters of the universe” have lost fortunes this year and the problem with private equity funds is you can’t take your cash out until the end of the 10- or 12-year cycle.
As a result, investors who want to get out of private equity funds are selling their stakes at 50pc discounts simply to get hold of some cash. Eighteen months ago, when the markets were soaring this would have been unheard of. Yet the Financial Times reports many such funds are in serious trouble.
If you think about it, it is not surprising that an investment vehicle designed for a bull market when credit was ubiquitous might have problems in a bear market undergoing the most violent credit contraction in history.
The fragile state of the private equity industry and the jumpy nature of previously secure investors, is another reason that Mr Lenihan shouldn’t touch these lads with a barge pole. In these conditions, a private equity owner of the Irish banks will make the debacle of Eircom seem like a honeymoon.
Most crucially, the private equity option doesn’t solve Mr Lenihan’s problem, which is the bad debts of the Irish banks stemming from property.
What happens to the private equity investment if they get their sums wrong today and run out of money to cover the debts of the banking system? They will simply walk away, leaving us with no banking reform and a bigger problem when the rest of the world is coming out of recession in a few years’ time.
Make no mistake about it: they will promise you the sun, moon and stars to get the assets cheaply, but once trouble begins they will not come to your aid and the Government will be back to square one.
Unless Mr Lenihan can quickly find proper strategic investors to take over our financial institutions, such as a large European financial player who knows how to run the business, he’d be better off waiting.
If he feels he can’t wait and private equity is his only option, we’d be better off if he nationalised the banks by taking a significant minority share using a preference share, which should generate a minimum 10pc to the State per annum.
He can also write himself an option to take more of the banks’ equity — on behalf of the taxpayer, exercisable in five years’ time — at a deep discount to today’s share price. You can use private equity money if you need a make weight, but don’t give them control. And of course, open up the recapitalisation to the Irish taxpayer as direct investors. The State can then sell its stake in a few years so the profit accrues to us the Irish people, not a bunch of private equity traders, masquerading as national saviours.
In this way we can stabilise our own ship, and solve our own mess in an orderly fashion. This was what the guarantee was about in the first place.
Private equity fund managers are not investors; they are leveraged traders. They think with a trader’s mind that tells them that as soon as they have bought, they need to arrange how to sell. Even if they wanted to invest for the medium term, the private equity time horizon is legally bound to sell during the timeframe of the fund, normally 10 years, or less.
Ireland’s degenerate bankers do not deserve to be saved.
However, we the Irish people, whose deposits, mortgages and business keep the banks open, deserve more than to be pimped out to the least suitable bidder in this, our weakest moment.
As someone who works in a financial institution I can agree that this case would be very, very bad for the country (not so much for the banks per se). I’m not concerned so much for my job as I don’t intend to be in the country in a year or so anyway. I am concerned for the trail of doom that it will leave. It really is feeding the “tiger” to the lions.
David I am amazed 10.30pm and 1 comment where are your loyal posters gone, could they all have left the country or are they celebrating Thanks giving early . ? This Friday in America within the retail trade is tagged as Black Friday as it is used as a gage to see what will be spent over their holiday season, well if Our Finance Minister lets in these vultures , it will be one of the Blackest days in this countries history. Our present Government really don’t seem to have an idea as to what they should be doing to… Read more »
Excellent article which pulls no punches. What’s the chance Brian Lenihan will heed your advice? Incidentally, I’ve heard nor spoken to anybody over the past week who has anything positive to say about the banks being acquired by private equity firms. It seems it’s almost unanimously regarded as an awful idea that will create new economic problems and exacerbate existing ones in the short to medium term. Being private equity, there is no long term. Based on the track record of most private equity firms (and people are talking about KKR for crying out loud) it would hurt bankers, borrowers,… Read more »
David, spot on regarding Private Equity. Especially the line where you say “They think with a trader’s mind that tells them that as soon as they have bought, they need to arrange how to sell.” I worked for a company that was bought out by a private equity firm. The management hailed them as the saviours of the company, but when we finally got to meet the new owners, they sang a different tune. The man from the PE firm addressed a worker meeting where he outlined his strategy, which was this: I bought this company for €250m, I intend… Read more »
Agree 100% and would go even further. I am nervous about the 500 billion Euro bank debts guarantee as it is, and if private equity firms had a controlling interest in enough of the institutions covered by it, that would be scary.. I think at this stage there is a higher chance of us having to pay out on the guarantee than of the guarantee actually expiring in 2010. Thats just my gut feeling, I cant see the banks letting the guarantee just expire unless there is a dramatic recovery in global liquidity. Should a deal go through with any… Read more »
If the banks pass to private equity its time to go. Would the last person here please turn off the lights. A black day to be Irish. Fianna Fail deserve to be utterly destroyed. This would be an act of treason.
David – I think the ‘new’ private equity funds set up for this deal plan to have a ‘very’ short investment horizon ? According to today’s reports ‘Mallabraca’ is doing preliminary due diligence for 60% of the equity in BOI – http://www.independent.ie/business/irish/83645bnfunded-mallabraca-may-take-60pc-boi-stake-1552724.html Great going for a company which was registered in the CRO less than 2 week ago ! What a ‘high potential start up’, even qualifies for Minister Lenihan’s corporation tax relief for start ups announced in the budget. If it does become a serious bidder, the performance of a related company reported Cardinal Asset Management would be interesting… Read more »
David: ‘Fraid i don’t follow the logic of your argument here. You treat the six big banks as though they were all one entity. You posit the false dilemma that the choice is between nationalizing the entire banking system or selling its entirety to a single private equity consortium. I think we can afford to consider several mix-and-match solutions. For instance we could cherry-pick the best to nationalize but allow the PEC’s to compete as best they can with the others, singly or collectively. The key to capitalism is competition. Although Ireland is probably too small for six viable international… Read more »
Having seen Cowen defend the FAS boss and still failing to provide any stimulus to the Irish economy. I would bet my bottom dollar we will see a bank sale to a PEC, rememnber who sold eircom ?
Couldn’t agree with you more David on all matters you have disscussed here since the begining of the finacial crisis. Seems like our minister for finance wants to pimp us out to a private equity consortium so lets hope he reads your arcticle and decides otherwise. Any chance you would run for government and become our next leader and help steer this mess of a country back on track? To be honest I’ve never properly experienced a recession before but having read a great deal about economic matters recently and realising how serious this downturn is becoming I feel the… Read more »
Agree that PE companies are bad news. They just don’t care. They, as one of the posters wrote, are all about “fixing balance sheets”. Now, a banking firm that wanted to engage in some M&A is actually concerned about entrepreneurship; improving operational efficiency in the hope of capturing new markets and selling more to existing clients. Healthy stuff. I’d look for a Pictet or an EFG, small private banks with tiny leverage and possible interest in owning a nation’s banks and making a good job of it. I live in Singapore where PE companies are everywhere. Their mandate is pure… Read more »
Treason on High Waters – should these vultures be arriving from the middle east allow me to remind the room about a delinquent bank formerly known as BCCI controlled by the rulers where many in Europe lost their monies and this bank had bases in London and Isle of Man and this bank is now no more .
Should these private investors secure a stake in B of I our two B&B’s are definately two soft eggs and do an injustice to the real B&B’s in the country where you can get a real Irish Breakfast
Hey?!!! Whats going on with our government? Whats going on with Lenihan? I’ve ceased to think that they are interested in looking after this country and its citizens but if Lenihan and company allow in private equity with a majority stake then I’m going to have to start looking at conspiracy theories and backhanders. Its crystal clear to the vast majority of people with a brain and some sense of nation that what is needed is for the state and its citizens to recapitalise the banks and in so doing to take a controlling stake. Does anybody else feel that… Read more »
Could it be that Young Linehan knows all this but spots an opportunity for Taoiseach? Brian Cowens days are numbered but a percieved honest to God effort by the Minister would leave him in line to run for the Big Job. He sees how the moguls and mandarins have a death grip on the countries processes and knows that they have to be brought back in line, following the two cooks in the kitchen rule.They too know that in losing Bertie, they lost their mentor. So the Minister allows the “Vultures” to strip out the banks short term with some… Read more »
I think that one reason there are few comments here must be because, essentially, everyone agrees. Letting private equity companies in at the national banking level is incredibly dangerous. As David says, their outlook is inherently short term, and that is exactly what we don’t need at the moment. It is, in fact, the opposite of what we need. The argument that they may be the “only option” is very questionable, although looking at the opinion of private equity companies might be instructive. If it is simply impossible to sell al the banks to PE outfits, then it’s an indication… Read more »
Hi Dav id, > it would be preferable for us to nationalise our banking system than to allow a private equity consortium to own and control our major banks. Private equity firms are probably the worst possible owners of a strategic asset like the banking system. Yes, its true that many Private Equity (PE) ventures are only out to make a buck. Ironically, many of these firms have in recent years been making their money and gains in the way you describe by leveraging heavily and by chopping up the assets, reducing long-term investment in the business, etc. A close-to-home… Read more »
we all seem to agree on most matters but what does that mean for all of us …..and how can we enforce what we agree …afterall many good comments have been made and explained …and we cannot continue doing that and or agreeing if it has no real purpose……in other words …how do we get action from our concensus of agreement and what support can we get to make a change happen for the best of our country …are we relevant to make a good change happen or are we illusionist ?
I agree with Stephen, it would be very informative to have their opinion, not the opinion they are expressing officially which will just be bullshit but the presentation that will be made to their partners for a go/no go decision. I cant believe people cant see how vulnerable we will be if the state continues to guarantee 500billion of bank debts remains while control of the banks is ceded to private equity firms. These guys will see the guarantee as another asset or tool in their locker to use as they see fit, and will be completely indifferent to the… Read more »
Lenihan yesterday referred to those who would “traduce” important sectors of our economy and then had people shifting in their seats by spelling these out as including “construction” and the “banks”. You really wonder, I mean, what are they thinking? Maybe the public service inefficiency isn’t all bad — that way you spare everyone the full force of Govt. policy.
Excellent article again, David. I was going to comment extensively but a) I don’t know enough and b) it would have sounded like Lisa Simpson at her most earnest.
Just listening to the news….. We’ve opted out of the EU’s 200 billion rescue project. We’ve a 500 billion guarantee described as a ‘theoretical’ risk and the worlds cheapest banks bailout by the minister. Now we want to rescue the banks but don’t want to spend any money. One common thread to the Irish governments actions so far …… a lot of bullshit, a lot of talk and then an embarrassed silence and a lot of coughing when it comes to putting our hand in our pocket or playing our part in fixing the problem. Everyone knows someone like this,… Read more »
Garry – fantastic……..well spoken
Limerick Leader Reporter Patricia ~Feehily proposes that Mr Willie O’ Dea ( qualified accountant and barrister etc ) should be made new Minister for Finance ……..and ….I Agree
Michael – I agree with all you said above and above…I think a national forum of consensus …is needed and ……….NOW
MK: “… the fundamental question. What will happen if a bank should fail, and is allowed to fail?” I know it’s a bit late in the day but you’ve often repeated this and I’ve been meaning to ask this question for a while now. What would in fact happen? (If the guarantee was removed.) Could deposits be protected and the rest let go? Because for most people as long as their money is safe they might not mind this. Or is it all or nothing? Excellent posts, Micheal. There’s a lot of repetition here – necessarily so because many of… Read more »
Even if the bank fails the mortgage is still due. You’re not going to get out of it.
according to the book : da wu yu code : those that did not escape changed into Dolphins …../ …u need to be lucky though
No offence David, but I find it ironic that the print version of this article appeared in a newspaper belonging to a mogul who sucked this country’s telecommunications infrastructure dry using something like those private equity firms you’re despairing about.
PS if Willie O Dea is made Minister for Finance then I will not be responsible for my actions. The biggest hypocrite from the most socially divided city in the country should not be allowed next or near the most important ministry. Defence is bad enough.
PPS Fianna Fail? Treason? Never!
What rot.
The average hold period for companies under private equity fund ownership is 6.5 years. The average listed stock is held by each successive owner for a little under 6 months.
How can people say private equity managers have a “trader’s mind” with “a ‘very’ short investment horizon” and are “in essence ‘flipping’ businesses” when they own their asset for ten times longer than listed equity investors?
David, You are right about one thing ; ‘Ireland’s degenerate bankers do not deserve to be saved’. The Irish banking system failed the test of the market. Their lazy and careless failure to properly assess risk deserves to be punished. A cleanout of this sector is necessary. If private equity can afford to swoop up ownership of the Irish banks at low prices that will ultimately land them a profit (something which is not guaranteed as you rightly stated in your previous article), the Irish financial community can have no complaints. However, I would say that PEF should not be… Read more »
There was shocking piece of one sided reporting about Declan Ganley tonight on RTE. My doubts about this man are well known on here but this was the most amateurish blackballing effort I have ever witnessed. Completely unsubstantiated innuendo and no face to face witness reporting. We don’t like challenge , do we , Mr FF? It makes sense out of FG though. Exist to give apparent opposition and take the Masters crumbs. There’ll be no outside PE involvement. Ranks are closing. Outrage is abating. Look at the responses on this blog alone. We can only take so much talk… Read more »
Many thanks for kind comments above, if people are keen to set up a structured discussion forum, and would like D McWilliams as initial forum leader (if he doesn’t mind) I can take care of the technical end. Suggestion : the forum becomes ultimately invite only, people can apply externally based on track record of comments made on similar sites, and the forum is well organised, with a lot of thought put into the ground rules. quality emphasised over quantity. people’s IDs remain theirs to reveal if they wish, or not. Non partisan politically, ultimate goal is discussion ground without… Read more »
Lisbon Treaty – I believe the contributions from this site on this subject only….. is only addressing the symptoms that cause the No vote such as …..working class votes ….women votes …and hard liners …these are only surface manifistations of the reality ………..there are deeper fundamental reasons way back in our history on this Island of Ireland that give reasons why the No vote actually happened .These reasons are real and unless we learn about them there will be no solution to solve this impass .I have referred in previous contributions to an ‘ Atlantean Mindset ‘….and that our official… Read more »
Back to finance, RBS in the UK couldnt muster any private money interest and only a mere 0.28% of a share issue was taken up. The UK government had to pony up ukp 20 billion approx. The bank, which is now owned 58% by the UK government, is effectively nationalised as a result of lack of private interest. Northern Rock, as we already know is UK-nationalised. This situation then raises the point, once the banks do become nationalised and if we did save them from the ‘vultures of private equity’, will they be ran any better? The answer is probably… Read more »
what does the site/room think david’s next article will be about in the Sunday Post this week end ?
I’d be very surprised if it wasn’t about Atlanteans
I must say, that the current topic of PE funding is actually quite difficult to comment on due to the technicalities of the subject matter. It seems clear to me that the only reason the banks may to attractive to a PEF is our sovereign guarantee of about 0.5 Trillion. There’s a lot of commission to be made getting loans arranged and putting the taxpayer into more debt. With that guarantee, that’s easy money and really, you do not have to make the bank system work better to get rich out of it. This is just another plain old asset… Read more »
cor – i am inclined to agree with you….actually we should initiate a lawful claim to it’s name and give ourselves as a nation a new sense of immortality …that should put us all ahead of the rest …the recession would then just pass over us and it’s mystery would bring back all manufacturing companies to ireland again with a renewed sense of security ….. a lot of the recession is in the mind …adaptability is the key to success
i remember a storey about a slim hungry dog in the garden and he saw through a gap in a wooden board that the garden next door was full of food and other big dogs…..so he slipped into this garden and ate all around him and became very very fat …………..and unhappy…..he decided to return to where he came from and found he could not fit through the boards because he was too fat…….he decided to stop eating too much and when he was back to himself again he returned again to where he came from …and is now a… Read more »
in two words………..Pat Cox
My attempt to summarise – PE in the banks would be a disaster; but we aren’t sure of the alternative options. Nobody actually knows what the real figures for the banks/credit institutions are and whether/if the govt could afford to be the bailer outer. An alternative type of bank would be a good idea; however, it isn’t clear how that could be created. The people who comment on this forum could create a virtual government via comments ;) Ireland is run by amateurs; and the banks are too. The PrimeTime ‘special’ on Ganley was a disaster; it looked (to me)… Read more »
Heres an option… The government should take a % stake in the private equity fund, with the option to buy remaining shares should the guarantee be invoked, and unleash the dogs of war on the banks..
hell, it makes as much sense as anything else
barry & Garry At the moment we’re living in somewhat contradictory times. The financial services system is broken, in fact it’s more than broken, because ‘broken’ implies that all we need is some glue, and it can all be well again. The truth about the banks, in the Republic, USA, UK, & probably elsewhere (Japan & China, perhaps) is that they are completely insolvent. The contradiction is that we need them to keep on working. They are a key part of our commercial infrastructure, just as the transport system (carrying food), clean water, and sewage are for towns. In each… Read more »
PE works great in companies where the business model is now obsolete, but there is a lot of inherent value to be flexed out. It’s brilliant for manufacturing and value shops like consultancies. A waste of effort in value nets such as banks, telcos, Transport operations because it’s impossible to isolate components without damaging the environment you operate in. In other words I wholehearted believe in the notion of nationalising Banks, Telcos and Transport companies – it’s the only model that works. PEs only want to make money. Fair enough…focus them where they cause little societal damage. The government here… Read more »
David:
As an Entrepreneur, I have been on the receiving end of Venture capitalists fro some time…singularly the most depressing period of my life (bar none). Armani clad crooks one and all. Never mind the American brigade, it’s Ireland’s own special nest of vipers you need to watch at this dangerous juncture. You know who I mean..the only time you see them is in an artist’s impression from a dock in a tribunal. I’m sure you could name them yourself…. Beware little Ireland,
I am Irish-American, if you want me to front the buy-out!
Funny how this discussion veered onto Lisbon. Most people I know claimed to vote no. They’re not “working class” and they all have degrees, masters degrees or doctorates. None of them had anything positive to say about Sinn Fein. Some have worked directly with the commission so they’ve a better idea than most. Their reasons were simple. 1) the treaty was largely unintelligible. 2) While the EU is generally well-intentioned, the last thing it needs is more power and less accountability. 3) There are simply too many special interests which supersede any influence the Irish may believe we have. The… Read more »
If private equity takes charge then maybe the banks will be run with a bit of commercial sense. And if the shares are sold off in a few years time, then that’s just the way of the market. The complicating factor is the government guarantee – I’ve heard the headline details, but am not familiar with the details. And the state proposing to pony up along side the private equity investors is troubling. A better way may have been to let the banks fold, with the state buying up their assets at mark to market prices with a view to… Read more »
David – until very recently, you advocated for all bankers to be sent to hell. PE ownership is hell. Why the sudden change of mind?
I see a thread running thro’ the above that says that money as we know it is gone. So spend it now and spend it wisely. Use it all up to get something that will tide you over the next 24 months. Buy tools or something that you can trade with your immediate community. Gold, skills etc. The game’s up and the banks have blown it. The banks need to be nationalised and the whole monetry system needs to be binned. Gov can issue punts again. But I figure all of Europe will be in the same boat and I… Read more »
Garry I’ve been a crackpot ever since the previous new economy, 1998. Remember, the final stage of an economic crash is capitulation. When everyone finally gives in, and the general mood is doom and gloom: The media stop cranking the smoke machine, all the mirrors are broken, and the politicians start blaming each other, rather than denying there’s anything really wrong. In my view we’re not there yet in the financial markets, let alone the broader economy, but it’s probably approaching. When capitulation arrives, and it will, it is the signal for better times. It is, by definition, the most… Read more »