Billionaires love sniffing around for bargains and there’s no better time to do that than during a downturn, where assets – and in some cases entire industries – can become distressed.
Of course, there are distressed industries and then there are those that are downright tormented. Even the most canny billionaire bargain hunter thinks twice about diving into those areas.
The global banking industry, which was arguably hit harder than any other during the GFC, would certainly appear to fit into the tormented category. Debt-laden balanced sheets, high costs and less-than-rosy profit outlooks make the sector seemingly unattractive.
And yet banking has suddenly emerged as a big target for a group of hardy billionaires. This was underlined last week, when former steel baron Wilbur Ross paid about $165 million to buy a 21% stake in Richard Branson’s Virgin Money group, which is aiming to build a retail banking business in the recession-hit British market.
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It hardly seems like a golden opportunity, but Ross thinks he’s spotted a long-term winner.
“It’s a classic distressed situation,” he told the Financial Times.
“What got the industry into these problems was over-rapid expansion and over-aggressive lending, banks making it too complicated. We see a chance to reinvent the system.”
Let’s take a closer look at Ross, Branson and a few of the other brave billionaires who want a slice of the banking pie.
Virgin Group founder Richard Branson has long tinkered around the edges of the financial services sector with his Virgin Money subsidiary, most notably in credit cards, home loans and insurance. But as the GFC took hold in 2007 and dissatisfaction with banks gripped the British public, Branson spotted an opportunity. His bid for the assets of Northern Rock failed (the British Government eventually bought the bank) but Branson has continued to build Virgin Money, hiring experienced bankers and applying for a banking license.
The plan now is to bid for the 318 Royal Bank of Scotland branches currently up for sale (NAB is also bidding for these assets), which would give Virgin Money an instant footprint. Failing that, there are likely to be other bank assets up for grabs or organic growth is an option.
Wilbur Ross, valued at $US1.7 billion by Forbes magazine, is probably best known for selling his steel business International Steel Group to India’s Mitta Steel for $US4.5 billion in 2004. He has also hunted for distressed assets in the textile, coal and automotive sectors. His love of distressed assets, particularly those formerly owned by private equity, is so great that he’s colourfully described himself as “the eraser on Wall Street’s pencil”.
As well as paying $166 million for his 21% stake in Virgin Money, Ross says is he prepared to spend another $830 million to help finance any acquisitions. It’s an impressive bet from a man who knows how to spot value.
Billionaire Andrew Beal, whose fortune was put at $US4.5 billion by Forbes last month, stood out in America’s banking sector as a man who actually managed to open a bank branch last year. His Texas-based Beal Bank has grown rapidly in the last few years thanks to Beal’s contrarian strategy. He basically wound down his bank between 2004 and 2007 because he thought credit markets were set to fall over; when they did, he started furiously buying up assets.
In 2009, his bank’s profit nearly doubled to $US540 million. Beal, a legendary poker player (he once reportedly won $US11 million in a day) has seen his fortune triple in the past 18 months.
However, it is worth noting that Beal has once again stopped buying assets.
“We are back in a credit bubble,” he told Forbes last month.
“We were buying like crazy a year ago, but all the good opportunities have gone away. We have slowed down dramatically and are not buying.”
His one exception is buying failed banks, particularly ones that come with some government support.
Jonathan and David Rowland
Father and son team David and Jonathan Rowland are worth about $1.03 billion according to the Sunday Times Rich List, and are best known for investing in property (David, known as “Spotty”, is a well-known developer) and the internet (Jonathan, who lacks a great nickname, founded a British internet company called JellyWorks).
In July last year the family bought the Luxemburg branch of collapsed Icelandic bank Kaupthing, investing about $328 million in the business.
The bank, now known as Banque Havilland, focuses on private banking and wealth management and is targeting high-net worth individuals in Europe, the Middle East and Asia. Jonathan Rowland described the deal as providing the family with the opportunity to build a banking dynasty.
“We’ve acquired a totally clean asset at the bottom of the market,” he said last July.
German entrepreneur Frank Asbeck is worth more than $700 million, thanks to his company SolarWorld, which, as the name suggests, sells solar power products. In January, Asbeck emerged with a 9% stake in German private bank Hauck und Aufhäuser, which is now entirely owned by private investors.
…and one more
It’s a bit early to tell what Malcolm Turnbull is going to do when he finally quits politics later this year, but he has expressed an interest in becoming involved in investing in early stage companies, particularly in the technology area. Turnbull has started and run investment banks in the past… could this rich lister also see an opportunity in this sector?