Carlyle’s Sarkozy Eyes European Shadow Banking Spoils

Carlyle Group is looking to capitalize on the growth of Europe’s shadow banking system, according to the head of the U.S. private equity giant’s financial services team, which Tuesday agreed to its first deal on the continent.

“What we see as being very much of a trend that we’d very much like to capitalize on is the development and growth of what is known as the shadow banking system [non-bank financial sector],” said Olivier Sarkozy, global head of Carlyle’s financial services team.

Carlyle struck a deal Tuesday to buy a majority stake in Barbon Insurance, a U.K. provider of tenant referencing and insurance products to the private rental sector. The company trades under the HomeLet, Letsure and Rentshield brands, and also produces the HomeLet Rental Index, which provides data on new tenancies and rental prices in the U.K.

Barbon is the firm’s first acquisition of a Europe-based company in the financial sector.

“If you look at banks in the U.S. versus banks in Europe, you have two like-sized economies, but if you add all the assets of all the banks in the United States you get to a number of about $15 trillion, which is approximately the same size as [the U.S.] GDP,” said Mr. Sarkozy, speaking about potential investment opportunities in the continent’s shadow banking sector .

“If you go through the same exercise in Europe, you end up with a number that’s approximately four times as large, indicating a banking system that has grown well beyond the natural parameters which you would otherwise expect.”

Mr. Sarkozy said that bank balance sheets in Europe will continue to shrink as firms reduce their activities to match the size of their deposit bases.

“As that happens, those assets are going to have to go somewhere else,” he said. “That somewhere else, as is the case in the U.S., is likely to be the shadow banking system.”

Mr. Sarkozy added that his team’s acquisition of Canadian ratings agency DBRS, announced last week, is an example of a deal that is set to benefit from the growth of the non-bank financial sector.

“We would expect [DBRS] would be a large beneficiary of that trend of a growing shadow banking system as securities are going to need to be rated,” he said.

Carlyle has also been looking at deals in the European asset management and mid-market lending areas, said Mr. Sarkozy. The firm is particularly keen on deals in the U.K., Germany and Spain.

Mr. Sarkozy said that while macroeconomic concerns and a lack of the right opportunities have prevented Carlyle from doing a deal in Europe until now, he hopes his team will do “a couple” more transactions on the continent through its current fund, which raised $1 billion last summer.

“The financial services landscape in Europe has been agitated to say the least, and while we did do some distressed investing in the U.S., we felt the degree of difficulty in Europe was greater given the regulatory bodies – which are now coming together into one but have historically been very disparate – the uncertainties of the economies, and the fact that doing a distressed-type deal from 3000 miles away is harder to do than if you’re actually in the country,” he said.

Although financial terms of the Barbon deal were not disclosed, the Lincoln, England-based company has a turnover of £27 million and employs more than 350 people, according to Barbon Chief Executive Martin Totty.

Duff & Phelps acted as financial adviser to Carlyle on the deal, while Linklaters acted as legal advisers. Canaccord Genuity acted as financial adviser to Barbon, while Jones Day served as the company’s legal advisers. Barbon’s management team was advised by law firm Osborne Clarke.

Alec Macfarlane – WSJ

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