Could private equity firms take over banks?

27 March 2006

As quality M&A deals dry up, large private equity firms, with huge pools of capital, will have to consider new targets. Old and uncompetitive banks that could benefit with a sharper management focus would make good targets. By Shahin Shojai, director, strategic research, Capco.

In recent years private equity firms have been playing an increasingly important role in mergers and acquisition activities. They not only help private companies raise capital and hopefully assist them in increasing their efficiency, they are also focusing on many large public companies as well.

The number and size of these transactions has increased quite dramatically in recent years, with many large public companies now being put into play by these investors.

In my opinion, one of the main reasons that the remit of the private equity firms has been expanded to such a degree has to do with the tremendous amount of capital that has being poured into these types of investments. The large source of accessible capital, and in many cases cheap, has had two implications.

Firstly, they allow private equity firms to focus on much larger targets than many were able to consider previously. Secondly, as the amount of capital available increased, so did the number of participants, the result of which was a sudden surge of interest in these types of deals and saturation in many markets.

These days, while private equity firms are still able to raise cheap capital, they are finding it very hard to find places to invest in. Many of the major markets are no longer able to generate the kinds of returns we were witness to up until very recently, and the business has now got to the stage that only the really clever investors are able to identify attractive targets.