Landesbanken draw back

In August, AXA Private Equity and LGT Capital Partners teamed up to buy a €620 million portfolio of private equity holdings from German bank HSH Nordbank – the latest financial institution to contribute to the record deal activity on the secondary market this year.

In Germany, many of the landesbanken, or state-owned regionally situated banks, had to be bailed out by the government after building too much exposure to risky real estate-related assets tied to the US housing market collapse in the US. As part of the deal, the likes of HSH Nordbank, WestLB and Landesbank Baden-Wurttemberg (LBBW) are having  to sell off private equity assets. The portfolios for sale range in value from €500 million to €1 billion, sources have told Private Equity International.

WestLB, for example, split into a ‘good bank’ and a ‘bad bank’ of assets to divest. Its private equity assets went into the bad bank, and are currently being auctioned off in a process run by Cogent Partners.

“For regulatory reasons in particular, banks have been theoretical sellers of private equity for the past couple of years,” says Elaine Small, a partner in Paul Capital’s London office.  “The German banks are no exception, although we are only now beginning to see German banks transacting. Banks have been very sensitive to the optics that accompany asset sales. Generally, banks have been willing to sell assets at or close to par, but unwilling to take a loss.”

However, pricing in the secondary market has improved this year to the point where sellers are happy to put assets on the market. First round high bids averaged 84.5 percent of net asset value in the first half of 2011, up from lows of 39.6 percent of NAV in the first half of 2009, according to data from secondaries broker Cogent Partners. As a result, the landesbanken have a better chance of getting at least close to par for their assets.

“We’ve begun to see sellers come to the market – and the German banks are no exception,” says Small.

Because of its conservative nature, Germany came later to private equity than other countries, says Axel Hansing, a partner with secondary firm Coller Capital. The landesbanken started to get into private equity in the early part of the 2000s, when certain government guarantees that made borrowing cheaper faded out, according to Hansing. Faced with higher financing costs, the banks started to invest in the US real estate market and moved into private equity investments, in part to build relationships with GPs who they could then lend to for deals.

Now, however, the bailout terms are forcing these banks to reverse the process – if, indeed, they can. Although HSH Nordbank was able to find buyers for its large portfolio, others – like WestLB and LBBW – may have a harder time.

“They’ve been trying to find one or two major buyers for the portfolios, [but] I guess the portfolios are probably too diversified to fit the bill of one specific buyer,” one secondary market source told PEI. “People are becoming more selective and poring over portfolios to find out which assets are of interest, but not necessarily bidding on the whole portfolio,” the source says.

The landesbanken don’t have much choice here: if their bailout terms require them to offload private equity assets, that’s what they’ll have to do. But after spending a decade building up this asset base, and the relationships that come with it, it does seem a shame that they’re now having to sell at a discount – even if that discount is not as big as it was.