Get Creative

US private equity firm Northern Lights Ventures shows how even smaller firms can get into the financial institutions game with a little creativity, writes Jennifer Harris.

Northern Lights Ventures has completed a deal that illustrates how private equity and venture firms can help financial institutions spin off non-core divisions as they shore up their capital bases in the market downturn.
Recently, the Seattle-based firm backed the management buyout of West LB Mellon Asset Management, a joint venture between German commercial bank WestLB and Bank of New York Mellon. The joint venture, which managed three hedge funds of funds, was based in the UK; the MBO represents Northern Lights’ first deal outside of the US.
With Northern Lights' backing, the joint venture's management formed a partnership called Goodhart. Goodhart acquired the three hedge funds of funds managed by the joint venture. Financial terms of the deal were not disclosed. The partnership now manages $549 million in assets on behalf of 22 clients in four countries. Northern Lights owns a minority stake in Goodhart.

Many banks are looking to cut so-called “non-core” business units in order to generate liquidity and eliminate lines of business that put pressure on the banks’ overall profitability, according to sources.

“Banks in the UK want to cut back their non-core business arrangements and go back to straightforward bank lending,” says Eamon Devlin, the Proskauer Rose attorney who worked on the deal. He says Proskauer is currently working on a number of other spinouts involving UK banks.

WestLB and BNY Mellon were content to let the team go, adds managing director James Wagar: “In the current environment management was quite receptive to selling them the business and having them depart on very good terms.”   
Investors also are looking for alternatives to committing money to larger financial institutions, which will benefit smaller, independent companies like Goodhart that enter the space, according to Northern Lights managing director Paul Greenwood.

“Many investors these days are reticent to invest with larger financial institutions,” Greenwood said.

Large firms have been in the news recently, like Carlyle and Blackstone, for bids to save failing banks. But as Northern Lights has shown, smaller firms can get in the game by using a little creativity.

Banks don't have to be failing to present attractive opportunities to private equity firms. As banks look to shed excess weight to better weather the financial storm, private equity stands poised to take advantage of the opportunity. Finding the right deals, at the right time and for the right price will be a key to cashing in.