In 2006 British based Private Equity management companies raised £34 Billion for investment in company buyouts. This is almost 4 times the total for 2003. This money would be used as the equity or deposit on a buyout deal. The figures lent by the banks would be something in the region of 8 times these figures. Figures from the British Venture Capital Association.
The United states figures for the same type of business however dwarf the U.K. In the U.S. £24 Billion raised for Private Equity investments in 2003 increased to a staggering £152 Billion in 2006.(Again this would form the equity or deposit in a buyout deal).
In 2007, the big international lending banks were unable to off load $300 Billion of loans to private equity financed companies. This means basically that the stock markets would not buy the debt from the bank in the form of 'stocks' which is the normal procedure for banks to off load debt along with any risk. The cash can then be used for new deals. (It might be worth noting that this is a totally un-sustainable unless the bank of England was generating new cash at the same rate that the banks could invest it otherwise a cul de sac would be reached when the day would inevitably come when there would be no money available to buy the banks debt!)
In the Spring of 2007, the U.K.s biggest private equity deal prior to the financial crisis took place. Kohlberg Kravis Roberts (KKR) bought Alliance Boots (The company that owns Boots Chemists) for £11.1 Billion. Of this total £9 Billion was mortgaged by major banks.
Due to the safety nets involved which protect the banks, these types of deals could continue as routine procedure and have done for a number of years before the banking crisis surfaced.
Those safety nets include;
1... Pension funds are first in line to pay the mortgage on the company, so they take on the risk should the company fail after taking on masses of debt after the buyout.
2...The initial money involved in financing the mortgage does not belong to the banks as this comes from deposit accounts and other types of 'high' interest bank account. So here there is still no risk to the bankers themselves. The risk to these savers is however restricted due to safety net three.
3...Safety net 3 is one we have all contributed to in the years since the banking crisis surfaced. This comes into affect when a large bank runs out of money due to its investments turning bad (Many are bad to start with). This is where a national central bank such as the Bank of England will bail out banks who have insufficient funds to continue operating as a bank. Although this should be an event which should occur only in exceptional circumstances, for most of us, those exceptional circumstances will be hard to find with today's banks. When I say exceptional circumstances could justifiably cause this event I refer to an Act of war or a national natural disaster. The 'events' that lead to the banking crisis however were none of these. The bail outs by the bank of England, Bank of America, and other central banks have been as a result of every day investments in 'business'. What is more incredible, is that this 'business' after all the turmoil it in-questionably has caused continues today.
In addition to the safety nets involved in the Private Equity business, the following is also a factor which would encourage lending by banks as the purchased business is likely to 'add value' to its self in the future. The reason for this has absolutely nothing to do with the actual product or service offered by the business. The reason is that otherwise innocent investors into pension funds need to be fed buy investments. What would otherwise be idol money, is pumped into businesses which then obviously over values those businesses. But this doesn't matter to the private equity management companies as long as they know there are other private equity companies with growing amounts of cash which must be invested. If they don't invest this money the pension fund investor will stop investing as there will be know interest to pay to the investor. This is a no go area for these types of investment company. You simply do not sit on heaps of invested cash, even when there may seem not to be any thing of good value to buy. This provides Private Equity Management Companies with good opportunities to sell a company at a good profit.
There is an other factor which contributes to the confidence that large banks have in lending money for big business buyouts, and one that gives the private equity management companies a Plan B. This is that if a private equity company is unable to sell a company to an other buyout company it can be floated on the stock market. In the stock market, stock brokers are in much the same situation as the private equity management company who has stacks of money which belongs to individual investors to invest which simply must be invested ... in something. Therefore companies off loaded by private equity companies who may have sold off many of the assets of the subject companies will still make a profit or at the very least cut their losses so they can go on to more lucrative deals. The secret of all this success basically comes down to the fact that the money the stock brokers will use to buy up these off loaded de-valued businesses is not their own money so they need not go into to much detail of justified values of companies and shares. The money they use belongs to investors with high interest (Relatively speaking) bank accounts. In the case of the Private Equity Management Company (Buyout Company), the money they invest is not their money as it belongs to the investors into individual pension funds. The money provided by the banks for mortgages for buyouts does not belong to the banks as this to belongs to investors with bank accounts. All in all the individuals earning millions and in many cases billions of Pounds, Dollars or Euros are taking on very little of the risk involved in these deals.
As a conclusion to this, you would have to say that the people involved in these deals though directly linked with the profits involved find themselves completely detached from any losses that may be incurred as these are passed on to other parties not directly involved in the deals.This has clearly had an affect on the lack of responsibility by the bankers in lending the vast amounts of money to business which will often de-value any product or service of a company along with the company its self.
As above I mentioned that the secret to the success of the bankers (And the bankers themselves have been individually successful financially regardless of the crisis) , Private Equity Management Companies and the Stock Markets is down to the fact that they never use their own money. Its pretty much a case of 'Heads' the banks win and 'Tails' the economy and the rest of us lose. May be the secret for the solution in preventing a future crisis is in how individual investors in pension funds, deposit accounts and other types of individual investments choose to invest their money in the future.
The United states figures for the same type of business however dwarf the U.K. In the U.S. £24 Billion raised for Private Equity investments in 2003 increased to a staggering £152 Billion in 2006.(Again this would form the equity or deposit in a buyout deal).
In 2007, the big international lending banks were unable to off load $300 Billion of loans to private equity financed companies. This means basically that the stock markets would not buy the debt from the bank in the form of 'stocks' which is the normal procedure for banks to off load debt along with any risk. The cash can then be used for new deals. (It might be worth noting that this is a totally un-sustainable unless the bank of England was generating new cash at the same rate that the banks could invest it otherwise a cul de sac would be reached when the day would inevitably come when there would be no money available to buy the banks debt!)
In the Spring of 2007, the U.K.s biggest private equity deal prior to the financial crisis took place. Kohlberg Kravis Roberts (KKR) bought Alliance Boots (The company that owns Boots Chemists) for £11.1 Billion. Of this total £9 Billion was mortgaged by major banks.
Due to the safety nets involved which protect the banks, these types of deals could continue as routine procedure and have done for a number of years before the banking crisis surfaced.
Those safety nets include;
1... Pension funds are first in line to pay the mortgage on the company, so they take on the risk should the company fail after taking on masses of debt after the buyout.
2...The initial money involved in financing the mortgage does not belong to the banks as this comes from deposit accounts and other types of 'high' interest bank account. So here there is still no risk to the bankers themselves. The risk to these savers is however restricted due to safety net three.
3...Safety net 3 is one we have all contributed to in the years since the banking crisis surfaced. This comes into affect when a large bank runs out of money due to its investments turning bad (Many are bad to start with). This is where a national central bank such as the Bank of England will bail out banks who have insufficient funds to continue operating as a bank. Although this should be an event which should occur only in exceptional circumstances, for most of us, those exceptional circumstances will be hard to find with today's banks. When I say exceptional circumstances could justifiably cause this event I refer to an Act of war or a national natural disaster. The 'events' that lead to the banking crisis however were none of these. The bail outs by the bank of England, Bank of America, and other central banks have been as a result of every day investments in 'business'. What is more incredible, is that this 'business' after all the turmoil it in-questionably has caused continues today.
In addition to the safety nets involved in the Private Equity business, the following is also a factor which would encourage lending by banks as the purchased business is likely to 'add value' to its self in the future. The reason for this has absolutely nothing to do with the actual product or service offered by the business. The reason is that otherwise innocent investors into pension funds need to be fed buy investments. What would otherwise be idol money, is pumped into businesses which then obviously over values those businesses. But this doesn't matter to the private equity management companies as long as they know there are other private equity companies with growing amounts of cash which must be invested. If they don't invest this money the pension fund investor will stop investing as there will be know interest to pay to the investor. This is a no go area for these types of investment company. You simply do not sit on heaps of invested cash, even when there may seem not to be any thing of good value to buy. This provides Private Equity Management Companies with good opportunities to sell a company at a good profit.
There is an other factor which contributes to the confidence that large banks have in lending money for big business buyouts, and one that gives the private equity management companies a Plan B. This is that if a private equity company is unable to sell a company to an other buyout company it can be floated on the stock market. In the stock market, stock brokers are in much the same situation as the private equity management company who has stacks of money which belongs to individual investors to invest which simply must be invested ... in something. Therefore companies off loaded by private equity companies who may have sold off many of the assets of the subject companies will still make a profit or at the very least cut their losses so they can go on to more lucrative deals. The secret of all this success basically comes down to the fact that the money the stock brokers will use to buy up these off loaded de-valued businesses is not their own money so they need not go into to much detail of justified values of companies and shares. The money they use belongs to investors with high interest (Relatively speaking) bank accounts. In the case of the Private Equity Management Company (Buyout Company), the money they invest is not their money as it belongs to the investors into individual pension funds. The money provided by the banks for mortgages for buyouts does not belong to the banks as this to belongs to investors with bank accounts. All in all the individuals earning millions and in many cases billions of Pounds, Dollars or Euros are taking on very little of the risk involved in these deals.
As a conclusion to this, you would have to say that the people involved in these deals though directly linked with the profits involved find themselves completely detached from any losses that may be incurred as these are passed on to other parties not directly involved in the deals.This has clearly had an affect on the lack of responsibility by the bankers in lending the vast amounts of money to business which will often de-value any product or service of a company along with the company its self.
As above I mentioned that the secret to the success of the bankers (And the bankers themselves have been individually successful financially regardless of the crisis) , Private Equity Management Companies and the Stock Markets is down to the fact that they never use their own money. Its pretty much a case of 'Heads' the banks win and 'Tails' the economy and the rest of us lose. May be the secret for the solution in preventing a future crisis is in how individual investors in pension funds, deposit accounts and other types of individual investments choose to invest their money in the future.
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