BofA Shuns Private Equity to Boost Returns With Direct Stakes
Bank of America Corp CEO Brian T. Moynihan
Jonathan Fickies/Bloomberg
Bypassing private-equity firms and their fees may help Bank of America squeeze out more profit and meet new U.S. ceilings on such investments.
Bypassing private-equity firms and their fees may help Bank of America squeeze out more profit and meet new U.S. ceilings on such investments. Photographer: Jonathan Fickies/Bloomberg
Aug. 13 (Bloomberg) -- Paul Miller, managing director at FBR Capital Markets, talks about the outlook for banking stocks, including Bank of America Corp. and PNC Financial Services Group Inc. Miller speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Bank of America Corp., facing new U.S. curbs on where it can invest, plans to bypass private- equity firms and acquire more direct stakes in companies to boost returns.
The bank, which inherited most of its private-equity investments through the 2009 purchase of Merrill Lynch & Co., sold about $3 billion of them this year, said Jim Forbes, global principal investments executive. Direct stakes can come with board seats, giving Bank of America more influence than as a limited partner in others’ funds, Forbes, who previously worked at Merrill Lynch, said in a telephone interview.
Bypassing private-equity firms and their fees may help Bank of America squeeze out more profit and meet new U.S. ceilings on such investments. Merrill Lynch wrote down private-equity investments by $1.2 billion in 2007 and $2.1 billion in 2008 amid slumping stock markets. Gains probably will be less than 5 percent annually in years ahead, said Rob Slee, president of Robertson & Foley, a Charlotte, North Carolina-based investment bank.
“You might as well invest in public equities for these kinds of returns,” said Slee, author of a textbook on private capital markets. Only a small percentage of private-equity groups have proven they have the skills to improve operations at companies they purchase, according to Slee.
Warburg Pincus
The bank doesn’t plan to make new investments in private- equity funds, according to Forbes, who said decisions to pare the relationships were in progress even before Congress imposed new rules on banking activities ranging from derivatives to debit cards.
Warburg Pincus LLC is among private-equity firms where assets were curtailed, Forbes said. Bank of America gained a 7 percent stake in two Warburg Pincus funds through its Merrill Lynch purchase, according to a March regulatory filing. The bank is selling $1.2 billion of commitments to the Warburg Pincus- managed funds.
Spokesmen Jerry Dubrowski of Bank of America and Rory Mackin of Warburg Pincus declined to comment on performance of the funds, which the filing showed had a carrying value of $797 million at the end of 2009, compared with $651 million a year earlier. Managers typically charge 2 percent upfront and 20 percent of any returns.
Focus on Control
“We’re very focused on control-oriented opportunities where we can have a meaningful impact,” said Forbes, who joined Merrill Lynch in 1995 and was named to his current post in March 2009. “We’ve also been very focused on returning capital back to the bank.”
Bank of America, the biggest U.S. lender by assets, hasn’t disclosed how much it has invested directly so far, Dubrowski said. Most of its $6.4 billion in private equity and strategic capital investments as of June 30 were direct investments, he said. Those stakes now comprise about 4 percent of Tier 1 capital at the Charlotte, North Carolina-based company.
The financial-services overhaul enacted in July limits how much lenders can put into hedge funds and private equity to 3 percent of Tier 1 capital. Details on how banks can make investments in concert with outside investors still must be decided by regulators, law firm Willkie Farr & Gallagher said in a July report.
Bank of America reported a $1.4 billion pretax profit from principal investments in the first half of the year, about 17 percent of the total, even though the investments comprise less than 1 percent of the bank’s $2.4 trillion in assets. Merrill Lynch executives cited private equity as a key growth engine with equity markets revenue gaining 43 percent in 2005 and 54 percent in 2007.
HCA, Pizza Hut
Holdings include a 26 percent stake in HCA Inc., the hospital chain that filed for an initial public offering in May valued at as much as $4.6 billion. That would be the largest U.S. IPO in two years. Merrill Lynch bought the stake in November 2006 along with an investor group that included Bain Capital and KKR & Co.
The bank also is sole owner of NPC International Inc., the largest Pizza Hut franchisee, a 33 percent holder of Nuveen Investments Inc., the largest manager of closed-end funds, and controls 14 percent of Hertz Global Holdings Inc., the world’s biggest car rental company. Bank of America is represented on each company’s board.
Lower Returns
Returns from private-equity funds plummeted in recent years. Funds created in 2001 averaged gains of 29 percent annually through December 2009, according to London-based research firm Preqin Ltd. Results from funds created in later years have been lower, with those formed in 2006, 2007 and 2008 showing negative returns, according to Preqin.
Slower U.S. economic growth of 2.4 percent in the second quarter means a smaller, less-profitable deal market, which prompted KKR to cancel a $500 million stock sale this month. The global credit slump has made it harder for private-equity funds to arrange large buyouts or exit from their holdings.
While many private-equity groups still have money to invest, new pledges are declining overall, said Steven Kaplan, professor of finance at the University of Chicago’s Booth School of Business. Results aren’t likely to improve if the firms are competing for the same deals, Kaplan said.
“When there is a lot of money available, returns tend to be lower,” Kaplan said.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net;
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