Do you ever get the impression that risk just goes around in circles? I’m relatively sanguine about a lot of the risk being created in the financial system right now largely because so much of the risk has been moved off banks’ balance sheets and into the portfolio of investors such as private-equity shops and hedge funds whose very raison d’être is to take on that kind of risk. But then today I see a Q&A with Jeff Raich, head of global M&A at UBS:
DJ: How can [KKR] handle such a big deal [as First Data] alone?
Raich: It’s partly a function of the investment banks becoming their partners. This is a continuing trend. You not only need to show up with debt, but equity and possibly an equity bridge as well. That’s the current ante for banks to play in mega-LBOs.
In other words, the investment banks have long since ceased to be fee-based advisers, and are now primarily valued for their ability to bring their own risk appetite to the table. And they’re not just taking on senior debt, they’re taking on equity bridges and even outright equity risk.
I would hope that the banks concerned are good at placing that kind of risk in internal hedge funds or PE funds where it belongs, and not on their own balance sheets. But I have a feeling that if and when a blow-up occurs, more than one investment bank will find itself severely damaged by the repercussions.
The good news, of course, is that a damaged investment bank is hardly the end of the world. But it’s the beginnings of a hint of a possibility of some systemic risk, all the same.