Hands predicts step change as SWFs move in on banks' traditional markets

  • @MrNickClark

The credit crunch which has paralysed the buyout industry will create aftershocks in the financial markets on the scale of London's Big Bang in the 1980s, the British financier Guy Hands suggested yesterday.

Mr Hands, the founder of the private equity company Terra Firma, gave his warning as he admitted that his overhaul of the EMI music label was not going as smoothly as he had hoped.

The credit crunch had hit so hard that banks would one day be left out of the financing process, he claimed, pointing out that private equity firms such as Terra Firma were already going directly to funds in the Middle East and Asia to raise money for deals.

"I do not believe the crisis in the credit market is just a cyclical blip that will simply work its way through the system," Mr Hands added. "It signifies a structural change taking place in the financial markets, which will make life substantially harder for all of us in private equity for years." He said the principal shift would come in relationships between private equity companies and investment banks, which until recently underwrote most of the debt used to finance buyouts. Since last summer's credit crisis, however, the leverage market has shuddered to a halt.

"The banks are going to face increasing challenges for years, and this will mean fundamental changes and challenges for private equity too," Mr Hands told delegates at the 11th Super Return private equity and venture capital summit in Munich. As buyout groups turned to pension funds, sovereign wealth funds and global money markets to raise debt, he added, "fees will fall and the banks will become less important to large private equity funds, and vice-versa".

Private equity groups such as Blackstone, Carlyle and Kohlberg Kravis Roberts have already started looking to raise money from alternative sources. Mr Hands said: "The banks' inability currently to underwrite new debt in any size will, I believe, lead to a radical disintermediation of finance.

"Over time, this will have effects on the international banking community as large as the abolishment of Glass-Steagall in the US in the 1990s and 'Big Bang' in the UK in the 1980s."

Banks, which have written down staggering losses over the past year , had a long way to go, Mr Hands said. "To date, [they] have declared only a fraction of the sub-prime and indeed leveraged buyout writedowns they will ultimately suffer," he said.

A World Economic Forum study has revealed that 75 per cent of the private equity deals completed since 1970 were carried out in the past four years.

Mr Hands reminded delegates that at last year's conference in Frankfurt, when private equity was booming, he warned that the industry could either "lie back like Nero and hope the good times continue to roll" or "work hard to add value and strive for performance not fees".

"Well, last year seems like a very, very long time ago and any lying back did not last long," he told the conference.

Turning to his buyout of EMI, Mr Hands admitted that the restructuring of the company, for which Terra Firma paid £2.4bn in August, had been "emotionally and physically" tougher than he expected and his 100-day plan to overhaul the underperforming group had not gone to plan.

He is trying to take power away from music talent scouts and give it to marketing men – a proposal that has drawn loud criticism from some of EMI's biggest acts. Mr Hands added: "It's a battle out there and it's going a little slower than I would like."