Letting the numbers do the talking makes sense and money for Cardinal

Its investment in Bank of Ireland was a turning point. Now Cardinal Capital is hoping to fund better times

The spectacular Gherkin building is the perfect place to look out on London’s financial world, from the City’s investment banks directly below it to Mayfair’s hedge funds, four miles down the Thames. Billions are traded daily as corporations and investors battle it out against their opponents in financial hubs around the world.

Nigel McDermott and Nick Corcoran thrived in that environment. The Dubliners had timed the opening of their Cardinal Capital Group office in the Gherkin well. Rents were low on the highest floors of London's newest landmark buildings. It was only a few years after 9/11, but McDermott and Corcoran felt it would be irrational to have any fears about this. They took the top office floor.

But in October 2007 Cardinal sold the lease of its London office. McDermott and Corcoran retrenched back to their base in an office in Dublin 4.

"We were beginning to think we saw clouds on the horizon," McDermott (56) told The Irish Times last week.


“By 2007 we had been in financial markets 20 years and seen a lot of crises,” Corcoran (46) added. “We felt pricing versus returns didn’t make sense. It was time to dispose of all of our assets. This left us in cash.”

Cardinal was convinced it was time to be cautious. It took some short positions on bonds, but stayed liquid.

An economic storm was coming. Starting in the US, it was on its way to Europe, and would ravage Ireland badly. Cardinal saw an opportunity and began to take a more considered view of Ireland's prospects. As others fled, or were wiped out, it thought about investing.

From Templeogue to Chase Manhattan

McDermott got into banking by joining Chase Manhattan Bank after secondary school at

Templeogue College

in Dublin. He can’t remember when he first met

Dermot Desmond

, who was then about 30.

Desmond was just back from working with the World Bank in Afghanistan, which had been invaded by Russia. "He was very young. I was even younger, my early 20s," McDermott said. "He had capital and a plethora of ideas."

They decided to co-found National City Brokers (NCB), a small money market and foreign-exchange firm. Over the next 14 years NCB became a full service brokerage. It shook up the establishment. McDermott helped it innovate and develop financial products that were new to Ireland.

In 1994 NCB was sold to Ulster Bank. The following year, Desmond set up International Investment and Underwriting (IIU), a private equity firm. McDermott was a founding director. It was the middle of a bear market, so assets were cheap. Private equity was the new focus.

Nick Corcoran was still in school at St Paul's CBS in Dublin when McDermott was making his name at NCB. Two years after leaving school in 1986, he got a job as a bank teller in AIB. He wanted to be a trader. He did a degree at University College Dublin at night, and got a job in the IFSC, trading currencies, but rapidly moved on to more complex trading.

Corcoran stood out. Fiercely clever, he was fascinated by finance and did well during the sterling and European currency crises. McDermott noticed him, as did others. In 1995, IIU convinced Corcoran to jump ship. But he only stayed two years.

“IIU wasn’t for me,” Corcoran said, “It was a different model for my skill sets.”

Corcoran instead became a founding director of Zurich Capital Markets (ZCM). He was 29, and joined the company with 12 employees, effectively as its number three. Then, in 1998, Russia defaulted.

“We had capital, a clean balance sheet and a triple-A rating,” Corcoran said.

It was a good place to be. Corcoran did well investing in Russian bonds, drawing on his AIB experience. ZCM expanded rapidly. It teamed up with Rupert Murdoch and Kerry Packer to buy a bank in Australia and fought its way through the fallout when the hedge fund Long-Term Capital Management collapsed.

In 1999, it even took a look at buying a tiny bank called Anglo Irish Bank, Corcoran said. But ZCM decided to set something up from scratch instead.

Corcoran and McDermott remained friends. IIU invested in ZCM deals structured by Corcoran. ZCM now had $11 billion in assets, and IIU was also thriving, but the two men wanted to set up their own business. In 2003, they did, with Cardinal.

Institutional investors wanted to invest in hedge funds, but couldn’t, because they needed more controls.

"The industry needed an institutional alternative asset platform," Corcoran said, so Cardinal created one. In March 2004 Isis Asset Management, an institutional investor, bought 15 per cent of Cardinal, valuing it at €50 million. Isis merged with F&C Asset Management. The merger was difficult, and Cardinal's platform was bought and taken in-house in 2006.

McDermott and Corcoran were on their own again. They started to look at what was next.

"Macro thinking leads Cardinal's view," McDermott said. In simple terms, their view was that money had been too cheap for too long in Europe, sending asset prices too high. A correction was coming. This was made worse, they felt, when the European Central Bank began to raise interest rates. "This was totally the wrong thing to do," McDermott said. "We had been around enough crises with currencies and devaluations to see a pattern. We began to think there was going to be hell to pay here, but there is also a great opportunity to bring capital and new structures to bear."

“The old hierarchy were very slow to recognise the extent of problems coming their way,” Corcoran added.

Cardinal crunched the numbers. It looked certain that Irish banks were facing big losses and would need new capital to survive. "We had a focused strategy to gain a foothold in Ireland via the restructuring of the banking sector and we developed this strategy with great partners such as Wilbur Ross, from WL Ross & Co, and Olivier Sarkozy, from the Carlyle Group, " McDermott said.

From 2008, Cardinal began behind-the-scenes talks with the then minister for finance Brian Lenihan and senior civil servants and bankers. In the main, the banks dismissed their view of the threats and felt they could ride them out.

Cardinal teamed up initially with Carlyle, JC Flowers, Bank of America and Sandler O'Neil. The consortium had €5 billion to invest. Its initial focus was Bank of Ireland, but it was prepared to look at other banks. "I think at the time we estimated that Bank of Ireland required around €3.8 billion and that AIB would need substantially more," Corcoran said.

The view of Cardinal and its partners was that all Irish banks needed a multiple of what their managements were telling the State was needed.

"The management of the banks were trotting into the Department of Finance, assuaging them of any fears they might have," McDermott said. "It wasn't rocket science. It just took cold analysis and rationality. We were surprised we didn't meet more people like ourselves. It was lonely."

“I think, to be fair to Brian Lenihan, he had so many voices coming at him and so many different views it was difficult to weed through that,” Corcoran said.

While the banks continued to insist that all was fundamentally well, Lehman Brothers collapsed, in September 2008. Two weeks later the State rushed to guarantee all the liabilities and deposits of the Irish banking system. All of the banks were on the brink, with Anglo Irish Bank nearest the edge.

“I don’t think I was surprised by the guarantee,” McDermott said. “Financial markets are confidence. Ireland was lurching from one problem to the other. I think it was forced upon them.”

“It was a brave decision,” Corcoran said. “Whether it was right or wrong, that will have to be assessed in an historical context. I think the prudent approach the State took to international investors will ultimately prove correct.”

Corcoran said the fact that 10-year Irish bond yields are now below those of the US and the UK was "down to the actions of the National Treasury Management Agency and the Government, who have shown that Ireland is a safe place to invest".

“When it comes to being critical about deposit guarantees and not burning the bondholders . . . Ireland is in a different place,” McDermott said. “We are a small open economy and our debt is distributed among many international institutions. We had a different set of cards to other states.”

Did the bankers lie to the State? “There is a real question mark about whether the then bank management just did not understand what they were saying, or they did and they chose to present it differently,” Corcoran said.

Lenihan asked Cardinal and its overseas partners to buy Anglo in the fallout of the resignations of its chairman and chief executive in December 2008. In a letter that emerged at the time, Cardinal told Lenihan he needed to sack Anglo’s entire board before anyone would touch it. Even then, Cardinal thought Anglo was too risky.

Could the State have done things differently with Anglo? “I think we should have nationalised it sooner,” McDermott said. “One of the untold scandals is the fact that they allowed the stock continue to trade as long as it did, knowing that quite innocent people . . . who aren’t close to financial markets will think it is cheap.”

Cardinal was never really interested in Anglo. It wanted to invest in an Irish bank with a good franchise, a relatively good balance sheet and decent management. With Bank of Ireland off the table, it turned to EBS building society. Cardinal felt that international capital could stabilise EBS and create a new third banking force. Billions were available to inject into it, and use to lend to businesses and consumers.

It teamed up to invest in EBS with Carlyle and the legendary billionaire investor Wilbur Ross and his canny vice-chairman, James Lockhart. Lockhart had served the US government in senior regulatory roles until 2009, so he knew his way around a banking crash.

"We were first introduced to Nick and Nigel by Carlyle's Olivier Sarkozy," Lockhart said last week. "We started to talk about what was going on in Ireland. Nick is very enthusiastic, really bubbling with ideas all the time, very creative. Nigel is very, very solid, understands finance really well. They are a good combination."

Smallest investor

Cardinal was the smallest investor in the consortium, but it had built up credibility with its insights into Irish banking. A deal took many months to put together, as there were so many stakeholders. With an investment close to being done, in March 2011, the National Treasury Management Agency announced that talks had been “terminated” on the direction of Minister for Finance

Michael Noonan


“The State was probably under pressure from the ECB at the time,” McDermott said. “The pressure was on Ireland for something simple.”

EBS was merged with AIB, in an attempt to partially fill a €20 billion hole in what was once Ireland’s largest bank.

“We were disappointed to be left standing at the altar,” Corcoran said. But he felt the State had tried hard to do a deal, and was now open to new thinking.

Wilbur Ross rang Cardinal within 24 hours of the deal collapsing. “We had done the hard yards with Wilbur,” McDermott said. “We had done a lot of analysis together on Ireland and Wilbur was saying let’s not waste it.”

Within months, the investment Cardinal had always sought was on the horizon. Bank of Ireland wanted to raise private capital towards the end of the first quarter of 2011, to prevent the State being forced to take it over. A flurry of phone calls took place. Kennedy Wilson reached out to Prem Watsa, the head of Fairfax in Canada. The US investment fund asked the billionaire investor to help it invest in Bank of Ireland. Watsa asked his friend Ross what he thought. Ross said he liked Ireland, but wanted to consult Cardinal, who had impressed him on EBS.

“He had a simple question: should he do this trade? Our answer was emphatically yes,” Corcoran said.

“Wilbur and myself had spent a lot of time studying the Irish economy,” Lockhart said. “We had gotten pretty up to speed looking at the EBS and their portfolio. We liked Nick and Nigel, first of all for their brainpower, but also their connections helped somewhat too.”

There was still a lot of risk. Bank of Ireland was facing various European stress tests, and if these went wrong the investors could lose their money. In total, the consortium invested €1.1 billion to acquire 34 per cent of Bank of Ireland in July 2011. It was a big cheque just nine months after Ireland had been bailed out by the European Union and the International Monetary Fund. A lot was on the line.

Three years later, the Bank of Ireland investment can be seen as a turning point in the story of the financial crisis. Afterwards, other major funds followed, spending billions acquiring real estate.

“It sent the right signals,” Corcoran said. “Private domestic expertise married with international capital works.”

In the summer of 2014, Ross sold out his investment, at a substantial profit. Unusually, the Department of Finance issued a statement thanking him. Cardinal also sold out, but says it remains “very positive” about the Bank of Ireland.

Richie Boucher, chief executive of Bank of Ireland, told The Irish Times last week he appreciated Cardinal's support at a crucial moment. "They are smart, internationally well-connected guys who are very thorough in their research," he said. "They put their own money into deals and have been very consistent and persistent."

Out of sight?

Cardinal appeared to fade out of sight after the drama of the crash and the Bank of Ireland investment. But, inside its Dublin office, it began working on its next plans.

“Looking beyond the banking sector post-2011, we identified the Irish corporate landscape as the next great opportunity,” McDermott said. With Ireland’s banks reduced from a dozen institutions to two or three banks, it saw a gap to fund good Irish businesses.

In July, the €290 million Carlyle Cardinal Ireland Fund closed. It was a joint venture with the Carlyle Group, now its regular partner. The fund’s mandate is to invest in small and medium-sized enterprises, and the State-owned National Pension Reserves Fund has put €125 million into it.

“We are here for the long term and we have a great partnership with Carlyle,” Corcoran said. “The National Pensions Reserve Fund as cornerstone investor shows that the State backs its own view of the recovery ahead.”

The fund recently hired Jonathan Cosgrave from Warburg Pincus and Peter Garvey from Goldman Sachs to help it look at investments.

It has already invested in Lily O’Brien’s Chocolates, and is close to more deals. It aims to help build Irish firms by giving them the funds and network to consolidate their sectors and move into new markets.

Cardinal is also back working with Wilbur Ross to close a €350 million fund called the WLR Cardinal Mezzanine Finance Company.

“We are targeting a structural gap in the real estate market,” McDermott said, “which is clearly identified in government strategy for the construction sector”.

This fund will act as a catalyst for deals. It aims to announce its management team soon.

There are other plans in the works too. “Persistence, not genius,” said McDermott, has taken Cardinal to this point. “We try to take a macro view and create opportunities.”

“It is gaps and opportunities,” Corcoran said. “We are positioned for recovery.”

After calling the bust, Cardinal is now predicting better times.