Privateers sharpen cutlasses for Irish raid

Ireland's banks should expect little mercy from the private equity firms offering much-needed capital, writes James Doranin New York

PRIVATE EQUITY companies are usually greeted as if they were pirate gangs from the Straits of Aden.

The way many people have it, these hostile funds roam the high seas of business looking for a stricken vessel. When they find one, like Bank of Ireland, they pull alongside and size up the booty on board. If they like what they see, they abseil in with cutlasses drawn to slash away at jobs and costs until they can handle the craft alone.

Once they have turned the ship around and steered it safely back to their lairs on Wall Street, these privateers carve up the loot and sell it off in bits to the highest bidder.

The Mallabraca consortium leading the charge on Bank of Ireland, and possibly Irish Life Permanent (ILP), includes some of the biggest and most aggressive funds in the US private equity sector.

JC Flowers and the Carlyle Group appear to be heading the consortium, with finance also being provided by a number of Middle Eastern sovereign wealth funds. The group is thought to be keen to invest €5 billion in some sort of combine involving Bank of Ireland and ILP and is said to have another €2 billion or €3 billion on hand to invest in Anglo Irish Bank too.

It is surprising that Carlyle is named as one of the leaders of this group, as the firm is more often associated with big defence and aerospace contractors than banking. Not so JC Flowers, which has long played a pivotal role in financial services sector restructuring all over the world.

J Christopher Flowers (50) is married with two children, plays championship standard chess and has a net worth of about $1.5 billion (€1.16 billion). The New York billionaire earned his stripes as a partner at Goldman Sachs and launched JC Flowers in 2001. The firm has two funds, both of which deal only in the financial sector.

His most significant deal - and one Bank of Ireland should examine closely - was struck in Japan in 2000 when the intensely-competitive Harvard graduate bought Long-Term Credit Bank (LTCB) of Japan, renamed it Shinsei Bank, and set about slashing jobs and fixing the balance sheet.

Just four years later, Flowers and his backers reaped $2.3 billion in an initial public offering on the Tokyo Stock Exchange. Today Flowers's personal stake in the bank is worth $540 million.

The deal was not without controversy. As part of the deal Shinsei could call on the Japanese government to purchase any debts that lost more than 20 per cent of their book value - like the so-called toxic debt that is crippling banks today. The special clause was called the "defect warranty provision" and was exercisable for three years after the sale.

Shinsei used the defect warranty provision to dispose of all the worst debts owed to the bank. Several companies that had used LTCB as their primary bank went bankrupt as a result, and there was uproar in Japan.

Chief among criticisms of the Flowers deal was the failure of the investors to warn the Japanese government of the risks inherent in the provision and that it was used to make massive profits for the investors at the expense of the bank's customers.

The Carlyle group is nothing like Flowers's hands-on operation.

The firm has close ties to the Bush family, as George HW Bush, father of the current US president, was a board member. John Major, the former British prime minister, was also a board member.

The company, which has $89 billion in assets under management, also has close links to the Saudi royal family and once did business with one of Osama bin Laden's brothers - a point made in Michael Moore's Fahrenheit 9/11 film.

But in the past few months the firm dubbed "the evil empire" by critics has been showing a stronger-than-normal interest in the banking sector. It seems the current financial crisis is too good an opportunity to miss.

In July Carlyle invested $75 million in Boston Private Financial Holdings, a publicly-traded wealth manager. The firm hired Olivier Sarkozy, a top banker from Swiss banking group UBS, and Christopher Dodds, the former chief financial officer of share trader Charles Schwab, to run the fledgling financial services investment operation.

It is no small surprise that the consortium is relying on Middle Eastern sovereign wealth funds for financial backing. These national funds are awash with cash following a two-year run-up of the price of oil.

Saudi prince Alwaleed bin Talal threw a cool $350 million at the US's Citigroup last week as a mere gesture to try to restore confidence in the stricken bank.

But the price of oil is falling and these sovereign funds are not doing as well as they used to.

In 1991 the prince became one of the world's five richest people and was described as the "Warren Buffett of the Middle East" by Time magazine. But this year Alwaleed's Riyadh-based Kingdom Holding Company has slumped 63 per cent in value, wiping out $13 billion.

TPG Capital, formerly known as Texas Pacific Group, and Kohlberg Kravis Roberts (KKR), two of the biggest US private equity firms, have also expressed an interest in a Bank of Ireland deal.

TPG founder David Bonderman is chairman of Ryanair and is keen to build a bigger profile in Ireland.

The firm has already been stung in the credit crunch this year as it lost a $1.35 billion investment in US bank Washington Mutual when it was taken over by the US government.

KKR, run by uber-aggressive New York titan Henry Kravis, is the most notorious buyout firm in the business. The firm's partners became known as the "barbarians at the gate" in 1988 with the $31.1 billion takeover of RJR Nabisco. The deal remained the biggest leveraged buyout in history for more than a decade.

In Ireland KKR is understood to have run the slide rule over Eircom in 2001, but that's as close as the firm came to a deal here.

If Bank of Ireland manages to remain independent of these firms, the bank's fate still rests somewhat in the hands of a US rainmaker.

David Herro, the chief investment officer at US investment firm Harris Associates, is understood to back an independent Bank of Ireland for the long term.

Herro is best known for unseating Saatchi brothers Maurice and Charles from their eponymous advertising firm when he was only 30 years old.

Whichever of these cut-throats - if any of them - succeeds in cashing in on Ireland's banking troubles, one thing is certain: these privateers will be taking advantage of the stormy seas of finance for months, if not years, to come, and they will doubtless emerge as key figures in the rebirth of the global banking industry.