US Private Equity On Sidelines As Singapore Goes For Merrill (MER)

Now that news has gotten around that Singapore’s Temasek may put $5 billion into Merrill Lynch to offset fourth quarter write-downs, the cycle of sovereign funds investing in US financial companies seems almost routine.

Troubled brokerages and banks are turning to money from China, Singapore, and the Middle East but US private equity firms have stayed out of all of these potential investments.

The easy theory to draw from the pattern is that banks do not want private equity firms to own any of their shares. There are potential conflicts of interest between bank and customer. But, in Japan and Germany, cross investments between firms with related interests were, at one point, routine.

Investors could also guess that foreign governments would be more likely to stay out of management’s hair. Sovereign funds are willing to take non-voting shares and appear to be happy getting a decent chance for an upside several years out.

But, these may not be the only reasons that large private equity operations have not invested in any of the current opportunities to own a piece of Wall St. Private equity companies are facing their own crisis as some of the recent deals that they have closed hit the wall of the bad economy. Reports are that Chrysler is already in financial trouble and its takeover by Cerberus is only a few months old.

There is no way of saying what the "balance sheets" of private equity firms look like today. Few are public like Blackstone (BX). That leaves a black box which is hard to open.

If there ends up being a big upturn in the value of US banks and investment houses in two or three years, domestic private equity firms will not be there to reap the benefits.

Douglas A. McIntyre