HBoS, one of the UK’s largest banks and a big investor in private equity, is cutting back the number of relationships it has with private equity managers in its £2 billion ($3.8 billion; €2.96 billion) portfolio.
A source close to the bank said it had relationships with about 55 private equity firms active across the buyout spectrum, reflecting its former interest in underwriting loans for buyouts from as little as £10m and up to £1bn. That range has now narrowed to start at around £250 million.
The source said the team responsible for putting the bank’s balance sheet to work in external private equity funds was focusing its investments on mid- to large-cap pan European buyout firms and dropping firms that operate at the smaller end of the mid-cap market.
He said this was consistent with the bank’s ambition, under Peter Cummings, chief executive of its corporate division, to be more selective and to underwrite larger deals, which generate bigger fees. Like most banks investing in private equity funds, it expects to win underwriting mandates from the private equity firms it backs, the source said.
Firms such as Gresham, a UK mid-market buyout house, which HBoS has backed in the past, would be unlikely to win support from the Scottish bank for its next fund. Gresham invests in deals with an enterprise value of up to £100 million, now deemed too small for HBoS leveraged loan team to consider.
The source said it was a natural evolution of the leveraged business and it meant the investment team was more likely to invest larger sums, between £50 million and £100 million, in bigger funds, such as those managed by Permira and BC Partners.
He said there was no target for the reduction in relationships and the team would reserve the right to invest opportunistically where there was no immediate strategic fit, but where one could develop.
However, an executive at mid-market private equity firm said the move was an admission that HBoS was now competing head-on with private equity firms in the lower mid market with its integrated finance team, which provides debt and equity in buyout transactions.
He said: “For a while now there was a real conflict of interest at the heart of what HBoS did. They funded these mid-market teams only to compete with them across the UK for deals, which they could always win because the integrated finance return profile was not as aggressive.”
The bank has always positioned the debt and equity offering as a complement to private equity. But recent deals have had more in common with traditional private equity. In June this year it took a minority stake in Vue, a UK cinema chain worth about £350 million, and in May it hired Robin Winning from 3i.