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London - From Ireland to Spain, Europe's embattled banks are throwing up potential deals for private equity firms, but the risks are high, the scrutiny intense and appetite for the sector in turmoil is scant at best.
That is likely to leave buyout firms cherry-picking some assets, rather than riding to the rescue by putting their billions of euros of funds to work on massive deals.
"If you have got a lot of nerve, there are a lot of opportunities in Europe at the moment," said Mark Stephens, deputy CEO of Aldermore, Britain's first private equity-owned bank, backed by financial services specialist AnaCap.
There is a long list of European bank assets, loan portfolios and even banks themselves on the market and attracting interest from specialist buyout firms.
But some see more potential in capitalising on the sector's woes by establishing a fresh banking brand, rather than taking over one whose reputation is in tatters.
Longer investment timelines and an intensely strict regulatory environment deter all but the most committed, while jumpy governments in the spotlight could scupper any deal.
JC Flowers says it is still keen on investing in Spain's Banca Civica and wants to restart talks once the savings bank resolves merger talks with CajaSol. It is also injecting £50m into UK building society Kent Reliance, and has been linked with more small deals.
And US investor Wilbur Ross and Ireland's Cardinal Asset Management are competing to take over Irish building society EBS.
But those hoping private equity firms would spend much of the capital they have for deals on rescuing some of the most distressed banks will be sorely disappointed.
"Most private equity firms find banks hard to analyse (and) hard businesses to leverage, and they find them very foreign businesses to understand," said one senior private equity partner who declined to be named.
Chequered past
The industry has a chequered history of investing in banks. Ripplewood and JC Flowers' original investment in Japan's Long Term Credit Bank - renamed Shinsei, or rebirth - has been hailed as one of the greatest private equity deals of all time.
But there have been horror stories too, such as an ill-timed investment by Flowers in Germany's Hypo Real Estate, which is now near-nationalised after a long legal battle.
"It is reasonable to assume that investors will need to see more stability before they can invest," said an industry source.
He said government recapitalisation, central bank liquidity support and agreements to share writedowns with holders of bank debt "will all need to be part of the ultimate solution" of attracting private equity to buy into the sector.
Buyout firms could pick up assets such as mortgage books to get early returns on their money, says Aldermore's Stephens, but margins on new portfolios are better and building a lender from scratch also means up-to-date systems and processes.
"My view is it would be worthwhile considering trying to set up a new brand in Ireland," said Stephens. "The existing brands are incredibly tainted."
But it can take two years for a new lender to get into the black, Stephens said, and investments could take five to seven years to realise, as opposed to the three- to five-year period buyout firms typically like.
The regulatory regime is more intense than ever, and with the sector firmly in the spotlight, governments are keen to avoid any further embarrassment.
"There's a massive fear about selling to someone who then makes a profit," said a restructuring banker, familiar with some assets under scrutiny in Ireland.
"(The Irish government) want to avoid the embarrassment of selling to a private equity firm who then makes hundreds of millions in profits a couple of years later," he said.
