PE hunts down bank bargains

Sales processes recently initiated by cash-starved banks are creating opportunities for bargain-hunting private equity firms. Lloyds is in advanced talks with 3i, Advent International and Coller Capital on a possible sale of its Integrated Finance unit. It was widely expected that Lloyds would sell off the troubled unit, which was formerly a part of HBOS. The sale has been a while in the making, with chats dating back 18 months and more.

Lloyds, however, is not the only bank looking to raise cash. RBS is looking to sell 318 of its branches to a syndicate including Blackstone, Resolution Group and National Australia Bank. The bank is also hoping to offload its global-card processing unit WorldPay, a deal that has piqued the interest of private equity big-names including Blackstone, TPG, KKR and Permira.

"Though there have been few deals yet completed by private equity in the financial services sector, there has definitely been a significant increase in consideration of them. This is because of the unprecedented shake-up in the banking model as well as external factors that have undoubtedly made these deals more deliverable," says John Cole, financial services partner at Ernst & Young.

The expanding sector has even inspired the creation of investment houses dedicated solely to the financial services market. Anacap, for example, was established in 2005 to invest exclusively in this area, and last year, the private equity house completed four big deals: the buyout of Ruffler Bank; the £70m acquisition of Cattles Invoice Finance; the buyout of Malta's Mediterranean Bank; and the purchase of the Czech subsidiary of Italy's Banco Popolare - a rather sizeable amount of activity in an otherwise slow period of investment.

With banks under pressure to raise cash and divest their assets, many of these units are being sold at lower-than-average prices, indicating that there is no better time to invest in this space.

Cole continues: "It's not all about the pricing. This is also the first time in my lifetime that there has been opportunity to create a new platform in the banking sector. A lot of private equity firms are asking themselves, is this a once-in-a-lifetime opportunity to get into the retail banking markets and make acceptable returns?"

According to Cole, if banks have to sell off their assets, they will be advised to do it quickly and save management both time, distraction and potential loss of value. On the other hand, however, he suggests, banks do not want to be forced sellers, meaning they have to find a balance.

2010 could prove to be the year for the financial services sector, as banks will be under even more pressure once the government's quantitative easing measures come to an end. Private equity seems to be keen to get in on the action.

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