Banks set up private equity divisions to combat bad debts

12 November 2008

It says that with bad debts multiplying in businesses and no market to sell on distressed debt, a debt for equity swap is an option for a lender whose interest cannot "crystallised".

Philip Davidson, head of restructuring at KPMG, says: “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.”

And once they've got a stake in the firm, he says it makes good sense for them to stick around.

While banks have historically sold out their investments in firms the moment the good times return, Davidson says this doesn't necessarily make the most of the investment, what with management costs nursing the business back to health.

He adds: "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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