StanChart’s Buyout Fund Retreat Explained Through One Soured Bet

  • Firm’s board said to approve plan to sell $5 billion PE unit
  • Stake in Nigeria’s Seven Energy shows risks bank aims to avoid

Bill Winters is questioning whether a private-equity arm fits his vision for a simpler and safer Standard Chartered Plc. An investment in a Nigerian energy firm shows why.

The chief executive officer and his board last month discussed the potential sale of Standard Chartered Private Equity to its managers, according to people familiar with the matter who requested anonymity as the talks aren’t public. The bank is leaning toward spinning off the unit, said one of the people, while the other said a range of options to scale back are being considered. SCPE, run by Joseph Stevens, manages $5 billion and has about 80 investments across Africa and Asia.

Seven Energy International Ltd., a Lagos-based oil and gas producer that missed bond payments last week, is a small fraction of SCPE’s fund. Yet it illustrates the types of risks that Winters is seeking to avoid as part of a broader push to rein in losses at the bank. Those include financial, regulatory and reputational risks, people familiar with the unit said.

The Seven Energy wager “illustrates that private equity investing, certainly in emerging markets, is rather risky and entire investments can prospectively be lost,” said Joseph Dickerson, an analyst in London with Jefferies LLC with an underperform rating on the shares. “Winters will seek to de-risk Standard Chartered, making it a simpler bank focused on core activities in commercial banking.”

Recent Losses

The energy company’s financial performance has suffered as commodities prices slumped, militant attacks closed a key pipeline and Nigeria’s currency collapsed. The company has denied allegations by a former central bank governor of ties to state corruption, an area of concern for a bank that’s still operating under a deferred prosecution agreement from a 2012 settlement for violating U.S.sanctions on trading with Iran.

Seven Energy has also used Standard Chartered as a lender. This type of an arrangement has concerned bank executives because it opens the potential for conflicts of interest, the people said. On top of that, new capital rules have made private-equity investments less profitable for all banks.

SCPE makes up the bulk of the bank’s principal investing unit, which posted losses of $272 million in the 12 months ended in June after producing more than $600 million of revenue for 2013 and 2014 combined. The unit manages about $5 billion, including $2 billion of the bank’s cash and another $3 billion for external investors including Goldman Sachs Group Inc. and Coller Capital Ltd., said the people.

Shaun Gamble, a spokesman for London-based Standard Chartered, declined to comment or make Winters available for comment. Bloomberg reported Sept. 16 that Winters was considering selling SCPE to its managers. The bank said at the time it was “looking at non-core businesses, or those that do not sit within our tightened risk tolerance.’’

SCPE bought a minority stake in Seven Energy for $48 million in early 2010, when oil was trading around $80 a barrel and Nigeria’s economy was booming. It invested more funds earlier this year as part of a $100 million fundraising. The oil and gas producer this month missed payments on $300 million of bonds, which had already slumped to 28 cents on the dollar, as a two-year slump in commodities prices was compounded by unique obstacles.

Attacks from militants have closed the Forcados oil pipeline, leading to a 54 percent drop in revenue for the first half of 2016, according to company reports. Amid currency controls imposed by the government, Seven Energy is struggling to convert sales made in naira into the U.S. dollars it needs to service much of its debts, and it faced “intense pressure” on its liquidity, the company said in an Aug. 26 statement.

The company has approval from creditors to restructure some of its debts, and “remains confident of its ability to weather the storm,” Patrick Handley, a spokesman for Seven Energy, said in an e-mail.

‘Survival Mode’

“The company is a viable business but is experiencing liquidity issues due to a number of factors beyond its control,” Aleksej Gren, an analyst with Exotix Partners LLP, wrote in a note to clients. “The company is entering survival mode.”

Private equity investments, and the board seats that often come with them, can carry a reputational risk. Standard Chartered informed the U.S. Department of Justice earlier this year about allegations of bribery involving MAXpower Group Pte, one of SCPE’s Indonesian investments, a person familiar with the matter said in May. Spokesmen for the bank and MAXpower declined to comment at the time, and no charges have yet been brought.

Seven Energy has fought off corruption claims of its own. In 2014, ex-Nigerian central bank governor Lamido Sanusi alleged that the firm obtained state-owned oil assets through illicit deals as part of a wider $6 billion scam, a bond prospectus shows. The company rejected the allegations in the prospectus, no charges have been filed against Seven Energy, and it has since successfully raised funds from debt and equity investors.

The company in that filing also listed as a risk reports surrounding Kola Aluko, a Nigerian oil investor who served as its deputy CEO and a director until 2011. Earlier this year, Nigeria accused Aluko and Atlantic Energy, a separate company he controlled, of diverting $1.8 billion meant for state coffers into his own “ventures,’’ court documents show. Seven Energy isn’t involved in the proceedings, which are ongoing.

Frozen Yacht

Nigeria’s Federal High Court this year issued a worldwide freeze on $1.8 billion of assets tied to Aluko, including luxury homes in three countries, a 65-meter yacht, three private jets, 58 cars, and Seven Energy shares, documents show. Tokunbo Jaiye-Agoro, who has represented Aluko in the proceedings, didn’t respond to e-mailed requests for comment, and attempts to reach Aluko through his foundation and a company he owns were unsuccessful.

Aluko is no longer involved in the management of Seven Energy and he surrendered most of his stock in the company within the past few months as repayment for more than $2 million of outstanding share-purchase loans from 2007, Handley said.

Highest Standards

“Seven Energy continues to adhere to the highest corporate governance and ethical standards, and regrets that the actions of former employees, taken since they left Seven Energy, have brought so much controversy to legitimate contractual arrangements,” Handley said.

Standard Chartered, which frequently lends money to SCPE’s investments, was a key lender to Seven Energy until at least 2014 as its debts ballooned to more than $800 million, company documents show. While the bank isn’t a current creditor, the two parties have an “ongoing relationship,’’ spokesman Handley said.

Deals where Standard Chartered is an investor and a lender introduce potential conflicts of interest, especially since SCPE doesn’t manage just the bank’s money, as equity and debt holders can have different priorities in times of financial stress.

“If Standard Chartered were to hive off or sell its private equity division, that would be a very good indicator that it is addressing these potential conflicts of interest,’’ said Sandy Chen, an analyst with Cenkos Securities Plc with a buy rating on the stock. “This could only help to improve their relationship with the regulators.’’

Winters, who joined as CEO last year, has laid out a plan to restructure $100 billion of risky assets and change the culture of the bank. He has said he discovered a “looseness” to the way the bank was managed when he joined, developed over years of good performance.

Under new rules, banks globally must hold more capital against investments in hedge funds and private equity funds, reducing any potential profits. U.S. regulators have also barred banks based there from owning more than 3 percent of such funds, prompting lenders from Citigroup Inc. to Morgan Stanley to cut their holdings.

“Most of their peers have come to the conclusion that private-equity divisions within banks don’t work in the current regulatory environment,’’ said Raul Sinha, an analyst at JPMorgan Chase & Co. with an overweight rating. “Investors would welcome Standard Chartered divesting the division.’’

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