Will European governments give away the banks?
Chris Flowers doesn’t make too many speeches, and certainly not in countries where he had invested in a pair of local financial institutions that later required government bailouts. But there he was at the podium in Berlin this morning, as a keynote speaker for the SuperReturn International conference.
The private equity investor’s primary message was that European governments will eventually assist in the sales of their troubled banks. Just like the U.S. did after the 2008 financial crisis, and Japan did nearly a decade earlier. In both of those cases, Flowers was a major player — helping to acquire IndyMac in 2008 and helping to acquire Long-Term Credit Bank of Japan (renamed Shinsei Bank) in 2000.
“Governments resist doing this… It’s like the phases of coming to terms with illness, the denial and ultimately acceptance,” Flowers said. “European governments… have to do this.”
The basics of such deals are that private equity firms like J.C. Flowers & Co. acquire the bank, while the national government assumes all, or part, of the bank’s risky loan portfolio. If the loans aren’t repaid, most of the loss is taken by the government. If they do get repaid, private equity reaps the benefits. It’s basically a “heads we win, tails you lose” scenario — well, so long as “we” are the private equity folks.
Flowers did note, however, that the European situation is a bit different than it was in either the U.S. or Japan. First, there is sovereign risk in Europe — particularly in countries like Greece, Italy, Portugal and Spain. Related to this are some liquidity concerns, which didn’t really exist in the U.S. or Japan. Finally, Europe features a multi-national financial regulatory body in Brussels that is full of competing interests.
But, for Flowers, these are challenges to be overcome. He said that he’s maintaining an unusually high level of “dry powder” in his firm’s $2.3 billion private equity fund, so as to be able to buy when the time is right: “If things end up being okay, then there will be lots of buying opportunities. But if the euro breaks up, everything is going to be a lot cheaper.”
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