Private equity and financial services
Is Cinderella at last getting to go to the private equity ball?
The long overlooked beauty in this case is the financial services sector, which (excluding real estate) accounts for about 25 per cent of UK stock market capitalisation but probably less than 5 per cent of private equity investments.
However, over the past few months there has been a flurry of deals, putative or completed, with a private equity component. Macquarie Bank is eyeing up the London Stock Exchange. Private equity houses are rumoured to be among the potential bidders for Collins Stewart Tullett, the inter-dealer broker. Private equity money has been involved in two of the specialist vehicles set up to consolidate and run closed-life assurance books and Apax Partners bought Travelex, the foreign exchange services group, in February.
Anecdotal evidence also suggests private equity houses have been casting more of an eye over financial services in the past year or two, and at least one ex-chief executive of a leading City company is planning to focus on private equity work.
But despite all this, it looks unlikely that a large golden carriage awaits this particular Cinderella. First, large swathes of the sector hold little appeal for private equity houses. These include commoditised high street banking – already highly leveraged – and life assurance, with its heavy capital demands and relatively low returns. Another turn-off is the heavy regulation of both industries, while trade buyers should have big synergy advantages over private equity houses.
General insurance, with strong and fairly predictable cash flows, has been the most popular segment for private equity investment, with interest ranging from Lloyd’s underwriters to Saga, the specialist in the over-50s consumer market, which was bought by Charterhouse Capital Partners, and the AA, the motoring organisation acquired by CVC Permira.
Stockbrokers have attracted less money – though Collins Stewart was originally a management buy-out from investment bank Singer Friedlander – perhaps because few of those potentially available are sufficiently big to get many private equity houses salivating, and trade buyers can provide potent competition, as with Cazenove’s joint-venture agreement with JPMorgan Chase.
While fund management ought to be attractive to private equity – Apax funded the buy-out of Azimut, an Italian investment management group – deals have been thin on the ground in the UK, perhaps because of the regulatory environment and competition from within the industry, with its ability to cut costs sharply.
So while a trickle of financial services deals will be done in the UK, the conditions do not look right for a glut of buy-outs similar to those in the retail sector. Quite a few of the successful deals are likely to involve parts of the banking and insurance sectors that have been outsourced – such as foreign currency and the consolidation of closed-end life funds. Not glamorous, not silver slippered princesses, but profitable niches with good growth prospects.
How much ground will Euronext give to the Competition Commission in an attempt to get approval for a bid for the London Stock Exchange?
Today is the deadline for Euronext and Deutsche Börse to respond to the Commission’s finding that for them to buy the LSE as matters stand would substantially lessen competition. This is because the two bourses either own or control clearing organisations and could make it difficult for potential competitors to gain access to their clearing services.
It is a moot question whether Deutsche Börse has the stomach to propose a fresh bid, but it will at least go through the regulatory motions. Euronext remains the likeliest partner for the LSE, and therefore its submission to the Commission will be particularly closely watched.
The Commission has suggested a range of possible remedies for both bourses, ranging from complete divestment of their clearing interests to a mere commitment to behave fairly to competitors. It has not made clear which it favours.
In the interests of European capital markets, the Commission ought to insist on the full divestment of clearing if either bid is to go through, since this would assist the creation of what is really needed – Europe-wide clearing and settlement utilities, independent of securities trading platforms, along the lines of the system operating in the US.
But the Commission may feel this is beyond its national remit. And even if this was where it came down, neither Euronext nor Deutsche Börse are likely to propose such a radical step on their own.
Euronext, in particular, can argue that, unlike Deutsche Börse, it has already gone some way to separate itself from its clearer, LCH.Clearnet. It may be the largest shareholder, with 41.5 per cent, but its voting rights are capped at 24.9 per cent and it has only four seats on the 18-person board.
Self interest suggests it will argue that commitments on behaviour are enough to ensure competition, while holding open the possibility of governance or shareholding changes at LCH.Clearnet if the Commission gets sticky.