Is private equity taking away bank business?

Now we can fast forward to 2009 and a completely different picture emerges.

China now holds the top 3 spots and America’s largest bank, JP Morgan Chase is merely in 5th place. You can do a whole range of further comparisons but the overwhelming conclusion must be that the financial world today is far different from a decade ago. And the power players have clearly shifted. If power were to be measured by the strength of financial institutions, 2009 must be considered a much more egalitarian world. No longer could the fate of things to come be dictated by one superpower only. An interesting thought considering the upcoming G20 meeting.

"Also to be factored in is the amount of money being given out to companies by private equity," cautions Jacoline Loewen, author of Money Magnet. "A lot of the business done by banks is shifting to private equity which does not show up on these charts."

Private equity and the bank share of market

In the book Money Magnet, Jacoline Loewen talks about how the unthinkable does happen. Like the music industry, technology is transforming the traditional banking and public markets.

"One of my themes is that private equity is slowly talking the higher risk bank lending and redoing this relationship," says Loewen. "Instead of being only a lender, the private equity people actually get a board seat and buy inot the business. Effectively, they are now a part manager too. It can seem high stress to an owner used to a nice lifestyle business but if you are going to earn a great deal more money, perhaps you can think about it."

Here is a chart to show the beginning of the big shifts in the world economy.

Rewind to 1999 to get a glimpse of the top 20 global financial institutions (based on market capitalization). The U.S. had 11 banks listed in the top 20. UK had 4 top 20 banks. Another interesting fact, the top 20 were dispersed among only 5 countries. US banks looked pretty good.

Green Technology is a Money Magnet

A survey, published by Environmental Entrepreneurs and CleanTech Ventures, shows that $2.9bn was invested in clean technology firms in 2006, up almost 80 per cent on the year before.
I predict Green is the new "bubble", with the growth set to continue, by 2010 investment in the sector could climb as high as $19bn. Here is a stimulus package!
There are already the market behemoths - like Google - just five firms attracted $600m of the total investment.
The reports says shifting public opinion and growing policy support for green technologies were two of the main raising agents that helped the sector attract more cash than even medical devices, telecoms, and semiconductor sectors. Biotech and software are still more attractive overall ($4.92bn and $5.25bn receptively), but have seen nothing like the same growth.
Green Technology is a Money Magnet and if you want to read more, check out the book.

Will this crisis end all future crisis?

There is one thing, however, that is clear to me.
The banking business has been around for a thousand years, it’s the life blood of any economy and it’s not going to go away. This crisis, when it’s all over, will have taken huge capacity out of the international banking and financial business. Those banks that survive this turmoil will be extraordinarily well positioned to do outstandingly well and I think that includes the Canadian banks.
In 1873, there was a financial panic and banking crisis in Paris and Baron Rothschild said the time to buy is “when there is blood in the streets”. Well, we must be getting close.
Booms, busts, bubbles, panics, crashes and bankruptcies – to some extent we’ve seen it all before, but somehow the system always survives, adapts and moves on to bigger and better things and, in time, I am sure it will again.
Also, we should remember that the U.S. economy is;
- the most entrepreneurial
- the most innovative
- the most competitive
- the most flexible and
- by far the most resilient in the world
For two centuries, it has demonstrated time and again an enormous ability to bounce back.
This time it may just take longer.
Will this be the financial crisis to end all crises – not a chance.
Twenty years from now, this crisis will be ancient history and long forgotten, and the young people running the businesses at that time will set out to do the same thing all over again.
Nevertheless, hope springs eternal and I hope the lessons of the past year and a half are indelibly ingrained;
- on central banks
- on regulators
- on Boards of Directors and most especially
- on top corporate management
so that the financial business may once again become an industry of choice for investors.

Step to recovery

The second key to economic recovery in the U.S. is the consumer and the key to the consumer is housing.
The consumer accounts for about 70% of GDP in the United States. Most recessions over the past fifty years have been caused by excessive inventories or over capacity.
This is different. This is a consumer led recession.
There is too much consumer debt and it won’t turn around until consumers have restored their family balance sheets and are confident once again to start spending. The American consumer has over-borrowed and overspent for a decade and is now tapped out. Irrespective of much lower interest rates and the prospect of lower income taxes, I believe we have moved into a multi-year period of consumer retrenchment and thrift.
The consumer in the U.S. is shell shocked.
Their equity and retirement portfolios are down but, far more importantly, 68% of American families own their own homes and home prices are down by more than 20% and likely to fall further.
If the value of your home drops by 25%, it shakes your confidence.
As a matter of interest the average Canadian carries 2 credit cards whereas the average American carries more than 6.
The average credit card balance per family is $2,000 in Canada and over $8,000 in the U.S. On top of all this, the job market is uncertain. In this environment I expect consumers to pull back and the U.S. personal savings rate, having fallen for more than twenty years, will now start a gradual rise back to the traditional range of 6% to 8% or higher.
The only way consumers can restore their balance sheets is by saving more and spending less – and spending less will delay recovery.