Jones Lang LaSalle
Ka-Ching!
Janet Lewis
February 20, 2006
At last month's World Economic Forum in Davos, Switzerland, one of the big talking points was the transformation of private equity funds from niche investments into an important part of the mainstream economy, helping companies more effectively allocate resources. David Rubenstein, co-founder of the Carlyle Group, went as far as to call it a "golden age" for these funds.
Indeed, private equity firms, coming off a year of record fundraising, have a mountain of cash and are reaching into nearly every segment of the corporate universe in efforts to invest it-pulling their investment bankers in their wake. Just as the late 1990s were halcyon days for technology bankers, the last two years have been superb for those covering private equity funds (often referred to as either "financial sponsor" or "financial entrepreneur" groups, they bring deal ideas to their private equity clients). Nearly ideal conditions in the debt markets have helped global buyout volume, including exits, more than double to $538 billion last year from $189 billion in 2003, according to Mergermarket.
"We're overwhelmed with business," says Harry van Dyke, a managing director at Morgan Stanley and head of business development in its financial sponsors group (FSG). "Things couldn't look better. The opportunity is enormous."
According to Morgan Stanley (see charts), financial sponsors were behind at least one-third of all IPOs over the past three years, and roughly half of those done in 2005. They were involved in more than one-quarter of all US M&A deals in the last two years, accounted for one-third of high-yield bond issuance and one-half of all leveraged loan volume. "Sponsors contribute anywhere from 15% to 30% of all investment banking fees, depending on how we do the accounting," says the head of financial sponsors coverage for a top-tier universal bank.
Banks are building up and refocusing their resources to service these increasingly important clients better-and in the process running up against some tricky questions. How many private equity firms should the bank cover? Should there be one or multiple points of contact? Should the FSG handle deal execution as well or stick strictly to coverage? And, when forced to make a choice, should the bank go after sponsors' business at the expense of traditional corporate clients?
There is no doubt that private equity firms make terrific clients. They do loads of M&A deals, and each acquisition generally requires a bridge loan, followed by refinancing in the leveraged debt markets. Often, once they own a company, they execute further recapitalizations and/or refinancings. They sometimes buy more companies in the same industry and then roll them together. And for every acquisition there is eventually an exit, either a sale or an IPO. Each of these activities rings the register for investment bankers. This mound of fees generally eclipses anything they would receive from a corporate client doing a simple acquisition, for instance.
However, there is some downside, modest though it may be. "Financial sponsors may be the best clients, but they are also the worst clients because they are the most knowledgeable," says Brad Hintz, a brokerage analyst at Sanford Bernstein. "They are so active doing deals that they are the leading players pushing down pricing in investment banking." The frequency with which private equity firms use investment-banking services gives them the leverage to put pressure on fees for M&A advice, equity and debt underwriting. And since they are generally former Wall Street financiers, they know exactly how things work.
Moreover, with their promise of outsized compensation, they compete with the investment banks for staff, with senior bankers setting off to start their own private equity funds and established funds luring away junior bankers.
Wall Street is certainly not complaining, though. It is going after private equity funds' business in a big way, sending in its most senior, well-connected dealmakers with plenty of ground troops to back them up. Observers say Lehman Brothers, in particular, has built its increasingly successful corporate finance business on the back of its FSG. Morgan Stanley has around 50 investment bankers worldwide in its coverage group. Goldman Sachs won't disclose how many bankers are in its FSG, but rivals say it also has about 50 worldwide. Citigroup has around 80, including bankers who help clients with fundraising. Credit Suisse, which unusually does deal execution within its FSG, counts more than 100 bankers worldwide.
"Although we have had a financial sponsors group for at least 10 years, over the last two and a half years, the resources focused on it have grown exponentially, consistent with the commercial opportunity," says Alison Mass, co-head of the FSG at Goldman.
Mass, who started working with private equity firms during the 1980s at Drexel Burnham Lambert, joined Goldman in 2001 from Merrill Lynch and became FSG co-head in 2003 along with Milton Berlinski, a senior dealmaker who was brought in from Goldman's financial institutions group. The two oversaw an almost fivefold expansion. Goldman now covers more than 100 funds, ranging from about $500 million to $10 billion in size.
Morgan Stanley's FSG has "close to doubled in the past two years," according to Van Dyke, who adds the investment bank is still recruiting in that area. The problem is finding good people. "The main limitation is how many are available," he says. "We've had great success with internal transfers from other parts of the bank."
Varying approaches
Some of the banks have different takes on the breadth of what their FSGs should be doing, especially when it comes to deal execution and capital introduction. As at Goldman, the FSG at Morgan Stanley concentrates chiefly on coverage, bringing in industry and product specialists to help with deal execution when necessary. "It's done on a case-by-case basis," says Van Dyke. "Execution is staffed out of wherever is expedient. Financing is often staffed from here."
Credit Suisse has perhaps the largest financial sponsor group because it does so much. "A lot of firms fully distribute out execution to industry or product groups, but not us-we eat what we kill," says Harold Bogle, head of the group at Credit Suisse. "The purpose is to bring the team at all levels closer to clients. And it benefits the junior bankers to get hands-on experience."
Kamal Tabet, global head of the financial entrepreneurs group, which is what Citigroup calls its FSG, says the bank has had a private equity coverage team since the late 1990s, which unusually integrates fundraising for its clients with the coverage function. The group has maintained its global headcount of about 80 people, and Tabet says it is currently considering expanding its coverage beyond the largest funds to include the next tier at the top of the middle market. Credit Suisse's Bogle says his firm is also eyeing an expansion of its middle-market coverage.
The vast majority of private equity deals are done in the small and middle market, although big deals get most of the attention. At Jefferies, a middle-market specialist, deal size for private equity clients ranges from $200 million to about $1 billion, says Adam Sokoloff, co-head of its FSG. "We always had financial sponsor clients, but we formalized the group about four years ago," he says, adding people from both outside and within the bank.
Now numbering about 15, the FSG manages the bank's relationships with private equity firms, but it doesn't do so exclusively. "There has to be a touch-point, but we do recognize that other people in the firm have personal or business relationships with private equity firms, and we encourage those relationships," says Sokoloff. "What's important is that we are all communicating."
The private equity view
Private equity firms see this increasing emphasis on "delivering the whole bank" through their FSGs as a step in the right direction. Mark Barnhill, a senior VP at Platinum Equity, another private equity fund, is among those who finds the silo structure that still reigns at many banks can be a hindrance, unless there is broader collaboration. "For us, siloing can be counterproductive, because our approach is not market or industry-specific, but based on a business profile," he says. "We look for noncore or orphaned businesses in sectors that we believe are ripe for consolidation."
That profile can encompass anything from high-tech to chemical manufacturers to logistics companies, says Barnhill, making Platinum difficult for bankers to pigeonhole. "We view the financial sponsor group as our advocate within the bank," he says. "The relationship management approach is quite helpful."
On the other hand, says Barnhill, his business development team actively cultivates relationships with a variety of product and industry bankers at each institution, both junior and senior.
Mark Holdsworth, a partner at Tennenbaum Capital, says most banks are not set up to deal holistically with his firm because of its unusual "hybrid" strategy-it does hedge fund and private equity investing from a single fund with a flexible mandate (see news story in this issue). "This is changing, however," he says. "The world is moving our way." But at the moment, Tennenbaum's 55 employees deal with bankers at all levels and in a variety of product groups.
Glenn Hutchins, a founding partner at Silver Lake Partners, says that it took the banks a while to master the art of covering private equity firms, with their multi-industry portfolios and use of many products. But now that they have, firms like his are confounding them again. "We have changed the model again by specializing in one industry, technology," he says, explaining that Silver Lake chiefly wants to talk to tech bankers, backed up by the financial sponsor bankers. He says Silver Lake will do 10 times more tech deals than any other investment banking client, and it should be treated accordingly, with bankers bringing all possible large-scale tech deals to its attention.
Three weapons
In the battle for private equity business, the investment banks have several weapons at hand in addition to their expertise in structuring and execution. One is their balance sheets, which allow them to extend bridge loans and underwrite high-yield bonds, leveraged loans and equity issues. That's chiefly what some larger firms, such as Silver Lake, need from them, since they often have plenty of M&A expertise in-house.
Another weapon is fundraising. Some banks, such as Citigroup, Credit Suisse, and Jefferies do this for their private equity clients for a fee, often through a separate group or subsidiary. Citi has a team of 19 bankers devoted to originating and executing fundraising mandates, working in partnership with its financial sponsors coverage bankers, explains Tabet. Citi charges a fee for the service, generally a percentage of new money raised. It considers it a strategic activity, since it not only helps the bank service existing clients, but helps it identify emerging managers.
A third weapon can be the banks' own private equity arms, though this can be a double-edged sword, and banks are now very careful how they wield it. In this new age of multibillion-dollar club deals done by groups of private equity funds, banks can sometimes clinch business by having their own private equity funds write a check, investing alongside their clients. Goldman's Berlinski says he considers "making equity available from the firm or from the fund for co-investment alongside our clients" an important service for the bank to offer. Indeed, the Goldman fund's willingness to join the private equity consortium in last year's $11.3 billion SunGard buyout after two of the seven funds dropped out-forking over $500 million in equity on two days' notice- got the bank onto the list of financial advisers and earned some valuable goodwill.
Most banks now stress this idea of "co-investment" and "taking minority positions" in client deals as a way of deflecting criticism that they are competing with their private equity clients. Several investment banks pulled back from this business in 2004 and early 2005 in response to this concern. "There was some controversy when private equity firms were concerned about their investment banks competing with them on deals," says Credit Suisse's Bogle. "We are trying to collaborate with our private equity clients, and we have told our largest clients we will not compete with them on large buyouts."
Touchy situations can still arise, however, occasionally needing to choose sides during an auction process, for example. It is clear that banks are in the private equity business for the long haul, however. One reason, obviously, is that the returns are too good to pass up. Another is that deals done by merchant banking or private equity arms generate business for the bankers.
"There's a wonderful synergy between merchant banking and investment banking, as long as you do a good job managing the conflicts of interest," says Bernstein's Hintz.
Democratization of ideas
In essence, these three weapons really come down to one thing: money. But as important as that is to the private equity funds, it pales in comparison to what they most want from investment banks: ideas. "For us, proprietary deal ideas and opportunities trump everything else," says Platinum's Barnhill.
However, in an increasingly competitive market dominated by auctions, few big ideas remain exclusive for very long. "For private equity firms, the proprietary idea is the elusive Holy Grail-it almost doesn't exist any more," says Silver Lake's Hutchins.
Explains Citi's Tabet: "Everything of more than $500 million in enterprise value is pretty much guaranteed to be an auction, with a lot of people looking at it." The increasing challenge, he says, is finding a different angle to help a particular client. He says that often involves connecting them with the right management team.
The other problem an auction presents to banks is that they have to choose which client to support. "You have to make some early decisions about who you want to back and in what capacity," says Tabet. Banks may have to choose not only among different private equity firms, but also sometimes between a financial buyer and a corporate client. Considering the more lucrative nature of sponsor business, it might seem an obvious choice, but that's not necessarily the case, bankers say.
For one thing, it's always better for a bank to win the sell-side mandate, which ensures that it will get paid. That most often means a corporate client. And even when a corporate strategic buyer is competing in an auction against financial buyers, the choice isn't always straightforward. "When we are not the sell-side firm, we have a decision to make," says one head of financial sponsors at a bulge-bracket bank. "The most important priority is whether there is a logical buyer, and relationship issues are very important. If a longstanding client says, We want to own this,' there is no point for us in jeopardizing that relationship to make an additional $10 million."
This banker's firm has a dedicated group of senior people that focuses full time on business selection and managing conflicts. "It's not easy, and of course, we don't always make the right decision," the banker says.
Private equity funds aren't really bothered by this. "What banks really need to do is the best job of matching the right seller with the right buyer, based on what is best for the business and the transaction, not for their fees or their long-term relationships," says Barnhill. "In the end, if they don't do that, the bottom falls out anyway."
Silver Lake's Hutchins says that private equity firms accept that the banks want to advise whichever bidder they think will win-simply put, they still want to get paid.
Bankers say that it doesn't, in fact, necessarily come down to a conflict between corporate and sponsor clients, because they really need to have both-corporate clients looking to sell assets value their knowledge of and contacts in the private equity world, and financial buyers want their corporate relationships and expertise to help them find deals.
One thing the bankers don't seem much worried about is that after all the frantic buildup, they will find themselves overstaffed in their FSGs if the private equity phenomenon proves to be a bubble. Morgan Stanley's Van Dyke, for one, doesn't expect that to happen. "I don't think this is going to come to a sudden end," he says. "If it did, a lot of things would have to happen at the same time: Both the debt financing market and the IPO markets would have to shut down, or get much more expensive." Even in that case, he says, private equity firms would still need to invest all the money they have just raised, which is subject to time limits.
Goldman's Mass agrees. "I don't think the private equity market will contract anytime soon," she says. "But even if it does, our bankers are flexible enough to do other things. After all, we recycled a lot of technology bankers, so we will recycle private equity bankers if we have to."
(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
Ka-Ching!
Janet Lewis
February 20, 2006
At last month's World Economic Forum in Davos, Switzerland, one of the big talking points was the transformation of private equity funds from niche investments into an important part of the mainstream economy, helping companies more effectively allocate resources. David Rubenstein, co-founder of the Carlyle Group, went as far as to call it a "golden age" for these funds.
Indeed, private equity firms, coming off a year of record fundraising, have a mountain of cash and are reaching into nearly every segment of the corporate universe in efforts to invest it-pulling their investment bankers in their wake. Just as the late 1990s were halcyon days for technology bankers, the last two years have been superb for those covering private equity funds (often referred to as either "financial sponsor" or "financial entrepreneur" groups, they bring deal ideas to their private equity clients). Nearly ideal conditions in the debt markets have helped global buyout volume, including exits, more than double to $538 billion last year from $189 billion in 2003, according to Mergermarket.
"We're overwhelmed with business," says Harry van Dyke, a managing director at Morgan Stanley and head of business development in its financial sponsors group (FSG). "Things couldn't look better. The opportunity is enormous."
According to Morgan Stanley (see charts), financial sponsors were behind at least one-third of all IPOs over the past three years, and roughly half of those done in 2005. They were involved in more than one-quarter of all US M&A deals in the last two years, accounted for one-third of high-yield bond issuance and one-half of all leveraged loan volume. "Sponsors contribute anywhere from 15% to 30% of all investment banking fees, depending on how we do the accounting," says the head of financial sponsors coverage for a top-tier universal bank.
Banks are building up and refocusing their resources to service these increasingly important clients better-and in the process running up against some tricky questions. How many private equity firms should the bank cover? Should there be one or multiple points of contact? Should the FSG handle deal execution as well or stick strictly to coverage? And, when forced to make a choice, should the bank go after sponsors' business at the expense of traditional corporate clients?
There is no doubt that private equity firms make terrific clients. They do loads of M&A deals, and each acquisition generally requires a bridge loan, followed by refinancing in the leveraged debt markets. Often, once they own a company, they execute further recapitalizations and/or refinancings. They sometimes buy more companies in the same industry and then roll them together. And for every acquisition there is eventually an exit, either a sale or an IPO. Each of these activities rings the register for investment bankers. This mound of fees generally eclipses anything they would receive from a corporate client doing a simple acquisition, for instance.
However, there is some downside, modest though it may be. "Financial sponsors may be the best clients, but they are also the worst clients because they are the most knowledgeable," says Brad Hintz, a brokerage analyst at Sanford Bernstein. "They are so active doing deals that they are the leading players pushing down pricing in investment banking." The frequency with which private equity firms use investment-banking services gives them the leverage to put pressure on fees for M&A advice, equity and debt underwriting. And since they are generally former Wall Street financiers, they know exactly how things work.
Moreover, with their promise of outsized compensation, they compete with the investment banks for staff, with senior bankers setting off to start their own private equity funds and established funds luring away junior bankers.
Wall Street is certainly not complaining, though. It is going after private equity funds' business in a big way, sending in its most senior, well-connected dealmakers with plenty of ground troops to back them up. Observers say Lehman Brothers, in particular, has built its increasingly successful corporate finance business on the back of its FSG. Morgan Stanley has around 50 investment bankers worldwide in its coverage group. Goldman Sachs won't disclose how many bankers are in its FSG, but rivals say it also has about 50 worldwide. Citigroup has around 80, including bankers who help clients with fundraising. Credit Suisse, which unusually does deal execution within its FSG, counts more than 100 bankers worldwide.
"Although we have had a financial sponsors group for at least 10 years, over the last two and a half years, the resources focused on it have grown exponentially, consistent with the commercial opportunity," says Alison Mass, co-head of the FSG at Goldman.
Mass, who started working with private equity firms during the 1980s at Drexel Burnham Lambert, joined Goldman in 2001 from Merrill Lynch and became FSG co-head in 2003 along with Milton Berlinski, a senior dealmaker who was brought in from Goldman's financial institutions group. The two oversaw an almost fivefold expansion. Goldman now covers more than 100 funds, ranging from about $500 million to $10 billion in size.
Morgan Stanley's FSG has "close to doubled in the past two years," according to Van Dyke, who adds the investment bank is still recruiting in that area. The problem is finding good people. "The main limitation is how many are available," he says. "We've had great success with internal transfers from other parts of the bank."
Varying approaches
Some of the banks have different takes on the breadth of what their FSGs should be doing, especially when it comes to deal execution and capital introduction. As at Goldman, the FSG at Morgan Stanley concentrates chiefly on coverage, bringing in industry and product specialists to help with deal execution when necessary. "It's done on a case-by-case basis," says Van Dyke. "Execution is staffed out of wherever is expedient. Financing is often staffed from here."
Credit Suisse has perhaps the largest financial sponsor group because it does so much. "A lot of firms fully distribute out execution to industry or product groups, but not us-we eat what we kill," says Harold Bogle, head of the group at Credit Suisse. "The purpose is to bring the team at all levels closer to clients. And it benefits the junior bankers to get hands-on experience."
Kamal Tabet, global head of the financial entrepreneurs group, which is what Citigroup calls its FSG, says the bank has had a private equity coverage team since the late 1990s, which unusually integrates fundraising for its clients with the coverage function. The group has maintained its global headcount of about 80 people, and Tabet says it is currently considering expanding its coverage beyond the largest funds to include the next tier at the top of the middle market. Credit Suisse's Bogle says his firm is also eyeing an expansion of its middle-market coverage.
The vast majority of private equity deals are done in the small and middle market, although big deals get most of the attention. At Jefferies, a middle-market specialist, deal size for private equity clients ranges from $200 million to about $1 billion, says Adam Sokoloff, co-head of its FSG. "We always had financial sponsor clients, but we formalized the group about four years ago," he says, adding people from both outside and within the bank.
Now numbering about 15, the FSG manages the bank's relationships with private equity firms, but it doesn't do so exclusively. "There has to be a touch-point, but we do recognize that other people in the firm have personal or business relationships with private equity firms, and we encourage those relationships," says Sokoloff. "What's important is that we are all communicating."
The private equity view
Private equity firms see this increasing emphasis on "delivering the whole bank" through their FSGs as a step in the right direction. Mark Barnhill, a senior VP at Platinum Equity, another private equity fund, is among those who finds the silo structure that still reigns at many banks can be a hindrance, unless there is broader collaboration. "For us, siloing can be counterproductive, because our approach is not market or industry-specific, but based on a business profile," he says. "We look for noncore or orphaned businesses in sectors that we believe are ripe for consolidation."
That profile can encompass anything from high-tech to chemical manufacturers to logistics companies, says Barnhill, making Platinum difficult for bankers to pigeonhole. "We view the financial sponsor group as our advocate within the bank," he says. "The relationship management approach is quite helpful."
On the other hand, says Barnhill, his business development team actively cultivates relationships with a variety of product and industry bankers at each institution, both junior and senior.
Mark Holdsworth, a partner at Tennenbaum Capital, says most banks are not set up to deal holistically with his firm because of its unusual "hybrid" strategy-it does hedge fund and private equity investing from a single fund with a flexible mandate (see news story in this issue). "This is changing, however," he says. "The world is moving our way." But at the moment, Tennenbaum's 55 employees deal with bankers at all levels and in a variety of product groups.
Glenn Hutchins, a founding partner at Silver Lake Partners, says that it took the banks a while to master the art of covering private equity firms, with their multi-industry portfolios and use of many products. But now that they have, firms like his are confounding them again. "We have changed the model again by specializing in one industry, technology," he says, explaining that Silver Lake chiefly wants to talk to tech bankers, backed up by the financial sponsor bankers. He says Silver Lake will do 10 times more tech deals than any other investment banking client, and it should be treated accordingly, with bankers bringing all possible large-scale tech deals to its attention.
Three weapons
In the battle for private equity business, the investment banks have several weapons at hand in addition to their expertise in structuring and execution. One is their balance sheets, which allow them to extend bridge loans and underwrite high-yield bonds, leveraged loans and equity issues. That's chiefly what some larger firms, such as Silver Lake, need from them, since they often have plenty of M&A expertise in-house.
Another weapon is fundraising. Some banks, such as Citigroup, Credit Suisse, and Jefferies do this for their private equity clients for a fee, often through a separate group or subsidiary. Citi has a team of 19 bankers devoted to originating and executing fundraising mandates, working in partnership with its financial sponsors coverage bankers, explains Tabet. Citi charges a fee for the service, generally a percentage of new money raised. It considers it a strategic activity, since it not only helps the bank service existing clients, but helps it identify emerging managers.
A third weapon can be the banks' own private equity arms, though this can be a double-edged sword, and banks are now very careful how they wield it. In this new age of multibillion-dollar club deals done by groups of private equity funds, banks can sometimes clinch business by having their own private equity funds write a check, investing alongside their clients. Goldman's Berlinski says he considers "making equity available from the firm or from the fund for co-investment alongside our clients" an important service for the bank to offer. Indeed, the Goldman fund's willingness to join the private equity consortium in last year's $11.3 billion SunGard buyout after two of the seven funds dropped out-forking over $500 million in equity on two days' notice- got the bank onto the list of financial advisers and earned some valuable goodwill.
Most banks now stress this idea of "co-investment" and "taking minority positions" in client deals as a way of deflecting criticism that they are competing with their private equity clients. Several investment banks pulled back from this business in 2004 and early 2005 in response to this concern. "There was some controversy when private equity firms were concerned about their investment banks competing with them on deals," says Credit Suisse's Bogle. "We are trying to collaborate with our private equity clients, and we have told our largest clients we will not compete with them on large buyouts."
Touchy situations can still arise, however, occasionally needing to choose sides during an auction process, for example. It is clear that banks are in the private equity business for the long haul, however. One reason, obviously, is that the returns are too good to pass up. Another is that deals done by merchant banking or private equity arms generate business for the bankers.
"There's a wonderful synergy between merchant banking and investment banking, as long as you do a good job managing the conflicts of interest," says Bernstein's Hintz.
Democratization of ideas
In essence, these three weapons really come down to one thing: money. But as important as that is to the private equity funds, it pales in comparison to what they most want from investment banks: ideas. "For us, proprietary deal ideas and opportunities trump everything else," says Platinum's Barnhill.
However, in an increasingly competitive market dominated by auctions, few big ideas remain exclusive for very long. "For private equity firms, the proprietary idea is the elusive Holy Grail-it almost doesn't exist any more," says Silver Lake's Hutchins.
Explains Citi's Tabet: "Everything of more than $500 million in enterprise value is pretty much guaranteed to be an auction, with a lot of people looking at it." The increasing challenge, he says, is finding a different angle to help a particular client. He says that often involves connecting them with the right management team.
The other problem an auction presents to banks is that they have to choose which client to support. "You have to make some early decisions about who you want to back and in what capacity," says Tabet. Banks may have to choose not only among different private equity firms, but also sometimes between a financial buyer and a corporate client. Considering the more lucrative nature of sponsor business, it might seem an obvious choice, but that's not necessarily the case, bankers say.
For one thing, it's always better for a bank to win the sell-side mandate, which ensures that it will get paid. That most often means a corporate client. And even when a corporate strategic buyer is competing in an auction against financial buyers, the choice isn't always straightforward. "When we are not the sell-side firm, we have a decision to make," says one head of financial sponsors at a bulge-bracket bank. "The most important priority is whether there is a logical buyer, and relationship issues are very important. If a longstanding client says, We want to own this,' there is no point for us in jeopardizing that relationship to make an additional $10 million."
This banker's firm has a dedicated group of senior people that focuses full time on business selection and managing conflicts. "It's not easy, and of course, we don't always make the right decision," the banker says.
Private equity funds aren't really bothered by this. "What banks really need to do is the best job of matching the right seller with the right buyer, based on what is best for the business and the transaction, not for their fees or their long-term relationships," says Barnhill. "In the end, if they don't do that, the bottom falls out anyway."
Silver Lake's Hutchins says that private equity firms accept that the banks want to advise whichever bidder they think will win-simply put, they still want to get paid.
Bankers say that it doesn't, in fact, necessarily come down to a conflict between corporate and sponsor clients, because they really need to have both-corporate clients looking to sell assets value their knowledge of and contacts in the private equity world, and financial buyers want their corporate relationships and expertise to help them find deals.
One thing the bankers don't seem much worried about is that after all the frantic buildup, they will find themselves overstaffed in their FSGs if the private equity phenomenon proves to be a bubble. Morgan Stanley's Van Dyke, for one, doesn't expect that to happen. "I don't think this is going to come to a sudden end," he says. "If it did, a lot of things would have to happen at the same time: Both the debt financing market and the IPO markets would have to shut down, or get much more expensive." Even in that case, he says, private equity firms would still need to invest all the money they have just raised, which is subject to time limits.
Goldman's Mass agrees. "I don't think the private equity market will contract anytime soon," she says. "But even if it does, our bankers are flexible enough to do other things. After all, we recycled a lot of technology bankers, so we will recycle private equity bankers if we have to."
(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
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