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The listed Italian bank is also in advanced talks to sell its factoring subsidiary Factorit, according to reports in the Italian press, which cited rumours that private equity group Clessidra is likely to buy the company before the end of the year. 

Multi-sectoral players with FIG specialists include Advent, Bridgepoint, Duke Street Capital, Summit Partners, KKR and Permira. Some of these private equity firms have hired FIG specialists from consulting firms and banks with no prior private equity experience, warned one industry source. “It can work, but it takes much longer as they need to learn about private equity first,” he said. 

Permira established a financial services team a year ago to look at larger financial transactions, appointing James Fraser, formerly at LEK Consulting, at its helm. The group made its first financial acquisition of Just Retirement last month for GBP 229.6m. “The market can expect to see plenty of other larger such deals coming out of big institutions,” said a second source. 

The three main reasons for financial institutions shedding assets are the need to strengthen their balance sheets, governmental pressure at both the national and European level, and institutions making the strategic choice to focus on core business, said Daan Knottenbelt, partner at Palamon Capital. 

However, areas such as balance sheet underwriting and lending can be very expensive if mistakes are made due to the leverage that is inherent in the business model, Knottenbelt pointed out. “Moreover, current regulatory changes, which are likely to lead to an increase in capital required on financial institutions’ balance sheets, are still not clear at the moment and people are underestimating that,” he said. 

Constraints in leveraging and in lending activity are leading to an increase in the cost of financing. “The availability of cheap credit has reduced dramatically since 2008 and volumes have dropped. We are not back to the previous levels of cheap, wholesale finance; margins are under pressure. The securitisation market will come back, but not as we know it,” warned Knottenbelt. 

While Skipton Building Society's sale of credit reference agency Callcredit to Vitruvian Partners a fortnight ago attracted a large number of non-specialist financial private equity players to the fray, there is less interest for assets that require specialist knowledge, the second industry source said. “You don’t need much specialist knowledge for credit referencing; but for deals in the insurance sector, investors wouldn’t understand the first line of a P&L statement unless they are specialised in the field,” he said. 

The number of financial assets being offloaded matches the thirst of private equity investors. Banks across Europe have been forced into offloading large non-core assets in an attempt to pay back state aid loans. The likes of Lloyds, RBS, KBC, ING, Dexia, and others have placed large "for sale" signs above a number of businesses, which are likely to attract the attention of private equity firms, sources said.

“A larger number of private equity players are turning towards the financials sector as they look for distressed assets – and this is a sector where there are those in abundance,” said a financials specialist banker. 

ING's decision to move away from a bancassurance model has left some its insurance assets on the market, while similarly Lloyds, RBS and KBC also have a number of businesses on the market that could attract private equity interest.

“Insurance is a sector that is going through a large consolidation period, and while we have seen many of these gobbled up by strategic buyers, there is a strong likelihood that private equity will be looking at them too. The same could be said of asset and wealth management operations also being offloaded,” the banking source said.

Duke Street has just over GBP 400m allocated to new investments from its current Duke Street VI fund and is interested in acquiring assets in sectors such as insurance underwriting and services, wealth and asset management, consumer and specialty lending, and financial technology, according to partner Miles Cresswell-Turner. In turn, Palamon Capital has been investing in insurance, consumer credit, payment processing, software, financial advice and direct debt purchasing since 2000, noted Knottenbelt.

The Retail Distribution Review (RDR) will help give Palamon new opportunities for its investment in IFA (Independent Financial Advisor) group Towry Law. The review dictates that from 2012, IFAs will no longer be able to charge commission for financial advice. Subsequently many of the smaller bodies will disappear. 

Despite an increase in appetite for financial deals in the private equity industry, there is not going to be a return to the profit margins previously seen in the market, according to Knottenbelt. “Unless a private equity house has an existing platform to buy businesses and build assets onto it is very hard, as you need scale and expertise; you can’t just buy a car loan portfolio on its own,” he concluded.

By Fay Sanders and Paul Francis-Grey

Source: 22/12/2009. Mergermarket.com