Walkers Examines Investments in Distressed Banks
GEORGE TOWN, Grand Cayman, Oct. 15 /PRNewswire/ -- Walkers, the global
offshore law firm of choice for companies, financial organizations, and
international law firms, has seen an increased interest from the private
equity industry in distressed assets, particularly banks and financial
companies. Private equity has a demonstrated ability to take on risk,
improve efficiencies and profitability, and turn companies around. These
qualities make private equity a desirable partner for banks and
institutions in the struggling financial sector. In the past 12 months,
private equity firms have bought US$20-30 billion of leveraged loans from
international banks including Royal Bank of Scotland, Credit Suisse, and
Deutsche Bank.
"The credit crunch and resulting fall-out has deprived private equity
of its ability to leverage off cheap credit, forcing it to adapt and find
new strategies to maximize returns," said Richard Addlestone, a Private
Equity Partner at Walkers. "At the same time, losses in the global
financial sector continue to increase and ailing banks and financial
companies need cash fast. Private equity is one source of capital that can
meet this demand."
Distressed funds raised more than US$66 billion in the last 18 months
and the International Monetary Fund recently estimated that the global
financial sector can expect to realize nearly $600 billion in losses, with
the possibility of the actual total being closer to $1 trillion. It is
clear that the financial services sector will continue to need vast amounts
of capital through the end of this year and potentially further into the
future. To ease the pain, private equity groups -- such as The Carlyle
Group, TPG Capital, and Blackstone -- are raising funds dedicated to
financial services. Forty percent of all private equity deals announced
thus far in 2008 involved financial services companies compared to 2% in
2001 -- nearly a 2000% increase over the past eight years.
There are several reasons that distressed banks and financial companies
are attractive to private equity. First, the investments are often
pre-leveraged. Second, in an emerging market such as India or China, the
acquisition of a financial company serves as a stepping stone into that
market. Additionally, debt is being sold off at low prices, and the weak US
dollar makes US banks appear to be relatively good value. Finally, private
equity firms are also looking to capitalize on the "bounce factor" -- what
is going down now will bounce back later.
"Traditionally, private equity has been wrongly accused of being
associated with secrecy, lack of transparency, big risk takers and firms
which take advantage of lax regulation -- the same behavior which arguably
caused the subprime crisis in the first place," Walkers Private Equity
partner Ian Ashman explained. "There is a false perception by some that a
rescue by private equity will encourage risky behavior and abusive banking
practices. Additionally, there is concern that private equity will cherry
pick the best parts of distressed assets and leave taxpayers to handle the
rest. But letting the banks and companies fail would leave taxpayers
holding the tab and paying the price for the whole lot."
On the other hand, private equity is recognized as "smart capital,"
adding necessary value during a time in which banks are writing off massive
amounts from their balance sheets. Private equity's success has thrived on
taking on risk and turning companies around by improving their efficiencies
and profitability. Right now the financial industry needs capital. Private
equity not only has a large pool of capital available, but it is also
willing to meet the demands of the industry.
"It is important to note there are certain regulatory restrictions
currently in place that will impact the full size and scope of the role
that private equity might play. In addition, private equity is not the only
option," added Caroline Williams, a Walkers Private Equity partner.
"Sovereign wealth funds (SWFs) are another form of financing being
considered by some distressed financial institutions. China Investment
Corporation has been in discussion with Morgan Stanley about taking a 49%
stake in the company and already has a 10% stake. In addition, it was
recently announced that the Bank of China will take a 20 percent stake in
La Compagnie Financiere Edmond de Rothschild, one of Europe's few remaining
independent merchant banks. However, certain political considerations may
affect the role that sovereign wealth funds could play and, like private
equity financing, there are pros and cons that must be considered. There is
no one 'right solution' and there is no magic bullet. However, it will be a
very interesting market to follow."
About The Walkers Group
From offices in the British Virgin Islands, Cayman Islands, Dubai, Hong
Kong, Jersey and London, the Walkers group provides legal and management
services to leading FORTUNE 100 and FTSE 100 global corporations and
financial institutions, capital markets participants, investment fund
managers, and growth- and middle-market companies.
The Walkers group is comprised of leading offshore law firm, Walkers;
fund services provider, Walkers Fund Services Limited; and SPV and
corporate services providers, Walkers SPV Limited, Walkers (Jersey)
Limited, and Walkers (BVI) Limited.
In 2006, Walkers was named as The Lawyer's Offshore Law Firm of the
Year, the PLC Which Lawyer? Yearbook Leading Cayman Islands Law Firm and
was one of two firms honored as "Offshore Legal Team of the Year" by the
Society of Trust and Estate Practitioners (STEP). Walkers was also named
the Who's Who Legal Law Firm of the Year: Cayman Islands for 2006 and 2007.
For more information on the Walkers group, visit us on the web at
http://www.walkersglobal.com or contact us by e-mail at
info@walkersglobal.com. To contact Walkers by phone, call our Cayman
Islands office at +345-949-0100.
SOURCE Walkers
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Related links:
http://www.walkersglobal.com
CONTACT:
Melissa Arnoff of Levick Strategic
Communications for Walkers, +1-202-973-1336, Mobile,
+1-202-276-0070, marnoff@levick.com
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