Ripple effects

The US banking bailout's potential implications and the first signs of private equity industry consolidation captivated PEO's global readership last month.

Mid-market GP Bridgepoint stunned the asset class and may have sparked a wave of peer envy when it revealed it would take over Hermes Private Equity, the direct investment arm of Hermes Group. Unlike the rumours that swirled around fellow London-based investor Candover Investments before its revelation it was in exploratory takeover talks with “selected parties”, the Hermes deal had been kept hush-hush since December.

It also took market observers by surprise because it hadn't been the first sign of industry consolidation most had been expecting, given the deal essentially puts in place a growth framework for both Bridgepoint and Hermes. It did not have a “hard luck” element, if you will, for one of the parties involved, as did Capital Dynamics' takeover of ailing US fund of funds HRJ Capital just a few days later.

For Hermes, which has committed to Bridgepoint's last three funds and counts the BT Pension Scheme as its sole investor, the deal allows it to focus on its £1.7 billion fund of funds platform. And – crucially – it paves the way for Hermes to build up a multi-faceted boutique asset management firm that raises third-party capital without potential conflicts. Bridgepoint, meanwhile, gains an 11-person lower mid-market team led by former Bridgepoint executive Rod Selkirk, along with two fully funded vehicles including £300 million of dry powder.

Potential for growth in the form of new deal opportunities is also presumably what lies behind many readers' interest in the US Treasury's latest policy measures meant to resuscitate the US financial system and broader economy. General partners were elated when Treasury Secretary Timothy Geithner announced a programme that would combine federal and private capital – complete with generous leverage ratios and an equity matching scheme – to purchase up to $1 trillion in “toxic” assets. While not a perfect fit with the mandates of most LBO firms, the potential for some specialised alternative asset managers to clinch lucrative, starring roles was unmistakable. As was the government's intent to rely heavily on private capital for future initiatives potentially affecting other asset classes.

Geithner-related euphoria sent US alternative asset manager stocks soaring for firms like The Blackstone Group and Fortress Investment Group. At press time, there were also reports that large public pensions like the California State Employees' Retirement System would also seek a slice of the toxic pie, making the federal programme even more interesting to watch, as GPs could potentially compete against their own fund investors for the same assets.

As a PEO Friday Letter recently declared, “it's all happening”. As the world's economies and the private equity asset class continue to undergo manifold twists and turns, expect PEO's team of journalists to keep connecting the dots.