Bankers worldwide, faced with a growing public and political support for the inevitable separation of their conservative retail banking business from some of their higher risk merchant and investment operations, since the sub-prime mortgage crisis and the subsequent bank losses and failures, are testing business models that would maintain their profitability as well as meet the newly proposed legal or regulatory rules. One such proven model is Private Equity business.A high risk, high return model which can and for all intents and purposes is needed to, within the new rules, invest in large scale development projects and ongoing business operations, that can independently raise debt financing from the surviving retail banks. With these new retail banks not being allowed to own a majority stake in any type of business, Private Equity allows the new bank to, with their own reserves, partner with high net worth individuals or other corporations, who would have been past customers of their merchant and investment banking operations, to equally invest as initial contributors. Hence, the new bank maintains its high return portion of its portfolio that is so important toward pleasing shareholders and competing for large deposits.
Staffed by key high performance personnel and state-of-the-art technology, the Private Equity model allows the merchant and investment operations, deemed too risky for retail banking, to be much more efficient, producing above standard returns on investment from strategic equity positions, mergers and acquisitions and other market activities. Comprising mostly of field personnel, armed with the best analytical and communication tools, visiting and assessing projects and ongoing business operations to guide the firm’s investment, monitor timelines, control cash flow and plot exit strategies.
Private Equity targets innovation, research and development which carry a high degree of failure hence, a high return on investment. Private Equity was the key element in the design and bringing to market of all transportation (automobile, aircraft, etc.) equipment, oil and gas exploration, coal and metal mining, electricity generation and transmission, real estate development, computer and electronic devices, the entertainment industry, telecommunication in use today and will always be the driving force in the future. New technologies, methodologies or treatments in the labs will never see the light of day without that high risk investment.
Another factor that will drive retail bankers to invest in a Private Equity firm is the tax credits. Government have traditionally granted tax breaks to individuals and corporations to encourage investing in what is considered to be strategically important sectors of their economy, such as agriculture, energy or infrastructure development. Hence, the new retail only banks (board of directors) are closely examining the benefits of investing in Private Equity, firstly for those somewhat elusive high returns, the reduce staffing cost usually associated with such returns and of course, the tax credits.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
