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Today's Top News1. Citigroup's new private equity report
The rules on stock underwriters and the distribution of stock reports by their research staffs are in flux right now. The global settlement on tainted stock research, which purported to set up a China wall between the bankers and the analysts, has long since expired, though most banks remain sensitive to the issue. Then again, the recently passed JOBS Act loosened the rules a bit recently, allowing banks to issue research on their IPO stocks earlier in the process. It's going to take some time to sort all this out. But in the meantime, Citigroup provides an example of how banks can support IPO issuers in ways beyond simply issuing research on the company with the standard, buy, sell or hold. Citigroup was one of the lead underwriters for the recent and disappointing Carlyle Group IPO. The bank came out with some relevant research even before the deal was priced. The research, by analyst William Katz, did not specifically look at Carlyle. Rather, it laid out a new way to view valuations of private equity firms, one that placed more weight on future distributions more than management and performance fees. "Our analyst added a supplemental valuation model to his existing sum-of-the-parts valuation technique for his entire coverage universe of alternative asset managers," said a spokeswoman for the bank told Bloomberg. "There were no meaningful changes to his target prices. The change addressed a significant appetite for an additional valuation methodology by investors in the stocks he currently covers." Was the report an attempt to influence the market in terms of the Carlyle IPO? We should give the bank the benefit of the doubt. But such a move perhaps would have been too controversial just a year ago, and the banks would have waited before releasing its report. For more:
Read more about: Private Equity, Stock Analysts
2. Big banks invade middle market
During recessionary times--and "recession" within the banking industry comes off like a euphemism--you just have to stay busy. If not, the axe man is more likely to pay you a visit. For some investment bankers at bulge bracket firms, that means moving downstream in a big way. A few years ago, deal advisors at the likes of Goldman Sachs, Morgan Stanley and JPMorgan Chase would have laughed at the idea of trying to shoehorn themselves into the thick of a paltry $500 million deal. But now they have no choice but to go after these deals with aggression. They're deal advisors after all; deals no matter how small put food on their tables and keep them employed in their chosen field. What else are they going to do? Reuters notes the views of one boutique advisory firm: "There's a big bank next to us on every deal we pitch, but it's not economical for them to be that far down market." Such deals will not likely pay the huge overhead these bigger banks operate on, and once the deal economy revives, they will likely gravitate right back to the blue chip companies. Reuters also notes that Goldman Sachs and Morgan Stanley "averaged fees of $2.5 million apiece on their middle-market assignments through May 1, while J.P. Morgan topped the fee rankings with an average of $3 million. Those figures are a far cry from a bank's cut on a $10 billion deal, which averages about $35 million, according to the data," but those fees are usually split among several advisors. For more:
Read more about: investment banking, Middle Market 3. Private equity's cloudy future
It's been more than four years since Steve Schwarzman was celebrated as the "Man of the Moment" by a Fortune cover story. The article, which coincided with the head of Blackstone Group's 60th birthday, proved to be a high water mark for the industry. The recession and financial crisis soon set in, and the private equity industry has yet to fully recover. The optimists are always suggesting that a sponsor-backed deal revival is just around the corner. But we never seem to really make the turn. To its credit, the industry seems to get the new reality, and as I've noted, has been making big moves toward a more diversified business model, one that includes more investment banking-like services and other forms of asset management. The Deal Professor weighs in with a look at all these trends, and concludes that "for the future barons of private equity, this means a world where they have less impact. Deals will be smaller, and their hedge fund brethren will reap the bigger publicity and fees. Even so, private equity will remain an interesting and transformative business, and yes, a profitable one." My take is that the industry might be wise to more fully embrace its identity as uber-managers. They will be forced to hang onto portfolio companies longer and longer, so why not manage them explicitly for the long-term with a focus on organic growth and with less of a focus on dressing companies up for sale and reaping special dividends. This would do wonders for their reputations. That said, the political controversy over their tax benefits will not soon go away. For more: Related articles: Read more about: Private Equity
Banks have discovered that short sales are a better bet than a foreclosure. Bloomberg Businessweek reports that sales of homes in the pre-foreclosure process, which are mainly short sales, increased to 109,521, up 25 percent from a year earlier and the most since the first three months of 2009. Meanwhile, "the number of bank-owned homes sold during the quarter fell 15 percent from a year earlier to 123,778." This makes complete sense, as bank fear more foreclosure related litigation and certainly do not have the resources to manage millions of unoccupied houses, though banks do want to boost rentals of homes they have seized via foreclosure. In hindsight, given the pain of the modifications and foreclosures on both sides of the table, we'll likely see more short sales in the short-term. But the surge will likely moderate fairly quickly for one big reason: The market is rising fast. There's anecdotal evidence to suggest that the real estate market is on the mend at the residential level; buyers are starting to emerge. In some niches in less hard-hit markets, prices may already be approaching their pre-crash prices. Rising prices would be welcome news to those who are on the bubble, giving them a market "out" that didn't seem possible just a year ago. For more:
Read more about: banks, mortgages 5. Analysts pare estimates for second quarter
The analyst jockeying has begun in earnest for the second quarter. As we head toward reporting dates, we'll likely see even more activity. Reports from analysts at Bank of America Merrill Lynch, Wells Fargo and JPMorgan Chase suggest that the first-quarter string of upside earnings surprises will not continue in the second quarter. The consensus seems to be that the strong FICC-oriented sales and trading activity that powered earnings in the first quarter is unsustainable, a result of the lingering Greek tragedy in Europe, the effects of the JPMorgan trading fiasco, and the threat of credit downgrades from Moody's. In addition, costs related to activity by the big GSEs to secure more putback agreements with banks is weighing on the minds of analysts. Bank of America Merrill Lynch's Guy Moszkowski cut his estimate on Goldman's EPS to $1.15 a share from $2.47 a share. He's now well below the all-analysts average of $2.51 a share. He cut earnings projections for JPMorgan to 61 cents from 67 cents, after already slashing from $1.16. He cut Morgan Stanley's earnings estimates to 38 cents from 48 cents, and he cut Citigroup's estimate to 94 cents from $1.03, as reported by Deal Journal. The wildcard in all this is core consumer banking operations. Such activity just might provide a stronger-than-expected offset to the weakness that so many now perceive. To be sure, interest rates are low, and anecdotal evidence suggests a kick-up in real estate activity. For more:
Read more about: earnings, Stock Analysts Also Noted
SPOTLIGHT ON... Jamie Dimon to testify before Congress Jamie Dimon, the CEO of embattled JPMorgan Chase, will testify next month at a Senate committee hearing, to be followed by an appearance before the House Financial Services Committee, according to media reports. It will be interesting to see if he's treated with kid gloves. My guess is that he benefits from the goodwill he built up in the wake of the financial crisis, when his bank emerged in fine form. He will likely strike a humble pose, as he is no position to level the sort of personal criticism that he leveled against the likes of Paul Volcker recently. Article Company News: Industry News: Regulatory News: And Finally…A mountain lion in your office? Article
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Friday, June 1, 2012
| 06.01.12 | Citigroup's new private equity report
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