Buyout professionals and investors say the investments haven’t generated the lending relationships some banks expected, but the shift is also being driven by impending bank capital regulations that will make it more expensive to hold private equity. Bank of America, JPMorganChase, Deutsche Bank and others have generated billions in sales to so-called secondary buyers, such as Coller Capital, Lexington Partners, Credit Suisse First Boston Strategic Partners and other groups that purchase limited partner’s stakes.
Being part of the private equity world, many of the sales aren’t being disclosed, though one secondary buyer says a deal worth roughly $1 billion is set to be announced because it’s so large.
Too many commercial banks piled in during the late 1990s with the hope of drumming up lending business with portfolio companies. “If you didn’t get in you might [have been] at a disadvantage,” said Kevin Prokop, a managing director at Questor Management Company, a Southfield, Mich. buyout shop
“It was a pay-to-play strategy,” said a private equity banker. “You write 15 different checks to 15 different private equity funds in the hopes of getting access. The problem is that every bank did it. Every private equity shop wound up with 10 commercial banks as investors. They couldn’t play preferences with one bank without screwing over the other guy.”
Prokop said it’s often difficult to keep the commercial banks invested in Questor happy. “It’s a tough decision about who to give business to.”
The Basel II international accord, whose capital requirements have yet to be implemented in the U.S., would make it more costly to hold private equity. Banks would be required to hold more regulatory capital in reserve for their private equity investments, often an 8-10 year commitment.
The good news for banks is that plenty of people want access to private equity investments right now. “It’s a seller’s market,” said Peter McGrath, an independent secondaries dealer in Toronto. “A lot of capital is ready to buy them up.”