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Lenders recruit private equity experts in anticipation of large increase in business ownership

12 Nov 08

The banking industry is setting up private equity style departments as their ownership of businesses increases in the worsening economic environment, according to KPMG

Philip Davidson, head of restructuring at KPMG, said: “With the levels of financial distress in businesses increasing and no market to sell on distressed debt, a debt for equity swap is an option for a lender whose interest cannot be crystallised.

“We predict a large increase in debt for equity swaps as trading conditions worsen, particularly in the first half of next year. This changes fundamentally the role of the bank’s relationship with a business, particularly where banks end up with a controlling interest.

“Each of the big commercial banks has set up a department to manage their increased ownership responsibilities. This approach is likely to be adopted more widely throughout the banking industry. Lenders are well-equipped with debt experts but traditionally they have not had a large resource of business managers at their disposal.

“As the liquidity crisis and economic downturn have changed the business of banking, so have staffing needs. There has been high profile coverage of job losses but the recruitment of business management expertise, from private equity houses or their own private equity arms in some instances, is a new twist in the tale.”

Davidson went on to comment on changing attitudes amongst the lenders to ownership of business.

“Historically banks have sold out of their equity interests as soon as there is an upturn in economic fortunes but this does not necessarily make the most of the investment, particularly if large costs have been incurred in managing the business back to health,” he said.

“If the new bank departments have experienced private equity specialists to deploy, they will be able to apply some of the longer-term, growth strategies practiced in the private equity industry. A more long-term approach creates a more stable footing for the business and could mean a more profitable return for the bank: a win/win result.”

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KPMG | Philip Davidson | restructuing | financial services

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