AVCAL: Skipping past the banks
One of the world's largest private equity funds, Blackstone Group, has stated its intention to go directly to lenders to finance future leveraged buyouts. Targeted sources include; hedge funds, sovereign wealth funds and smaller banks which haven't been as affected by the credit crisis. The demand for debt securities backed by LBOs reduced significantly in August along with the collapse of the U.S. subprime mortgages.
As a result, the banks have been left with approximately US$230 billion of debt to clear off their balance sheets. JPMorgan has decided to keep US$4.9 billion of leverage loans, changing their classification from "held for sale" to "held to maturity". The bank still has a further US$21.4 billion of loans still classified for sale, indicating the intention to syndicate them. Major PE firms have already started to go directly to hedge funds for their debt financing. Debt providers for Hellman & Friedman's purchase of Goodman Global (~US$1.8 billion) included fund manager Farallon Capital Management and hedge fund manager GSO Capital Partners.
The threat to bypass the banks poses significant potential losses to the investment banking industry. According to Freeman & Co. and Thomson Financial, JPMorgan alone earned US$412 million through arranging loans for US buyouts during 2007. This was more than twice the amount JPMorgan received in advisory fees. Banks have retaliated, stating that private equity firms will be entering into a market where they have less knowledge, fewer structuring skills, smaller distribution networks and taking on the "storage" risk associated with financing deals.