Merrill’s private equity arm in limbo

As part of a frantic weekend on Wall Street, Bank of America has agreed to acquire Merrill Lynch, including its investment management business. A spokesman said it was ‘too early’ to tell whether the deal would include Merrill’s private equity portfolio, or whether it would spin out as an independent firm.

The $50 billion (€35 billion) sale of US investment bank Merrill Lynch to Bank of America, expected to complete in early 2009, is the “strategic opportunity of a lifetime,” according to Ken Lewis, chairman and chief executive officer of Bank of America.

Speaking at a press conference this morning, Lewis said the deal to acquire the investment bank had come together over the past 48 hours after it became apparent fellow bank Lehman Brothers would be filing for Chapter 11 bankruptcy protection. At the time of press, Lehman Brothers had just filed for protection.

A statement revealed Bank of America and Merrill would combine their investment management arms, including an approximately 50 percent ownership in BlackRock, which has $1.4 trillion in assets under management. Bank of America has $589 billion in assets under management, the statement added.

Merrill’s commercial real estate operation, which includes real estate finance, private equity investments and investment banking services, is believed to be included in the deal. A spokesman was unavailable for comment. 

This spring and summer, Merrill Lynch executives revealed they were raising third party real estate funds targeting Turkey and Asia. In April, the bank's Pacific Rim head Damian Chunilal told reporters at the Boao Forum, a yearly pan-Asia policy summit in China’s Hainan Province, that Merrill was a $2.5 billion to $3 billion property fund to invest in Asia. He went on to say the move was part of a larger push by the firm to create private equity-style funds, and could involve infrastructure in the future.

In 2004, Merrill hired former Blackstone Real Estate Advisors co-head Thomas Saylak to lead its venture into principal real estate investing. However, according to media reports at the time, Saylak left the firm by 2006 because of delays in launching a fund and owing to the departure of Jeff Kronthal, who was Merrill’s head of Global Principal Investments & Secured Financing at the time.

Today's deal though does leave unanswered questions for Merrill’s global private equity portfolio, after another spokesman said it was “too early” to say whether the deal would include ownership of Merrill Lynch Private Equity, or whether the alternatives arm would spin-out, like Bear Stearns Merchant Banking.

When Bear Stearns, Wall Street’s first big casualty of the subprime crisis, was bought by JPMorgan in March, its London-listed fund of funds vehicle was rebranded as JPMorgan Private Equity, but it core private equity arm, Bear Stearns Merchant Banking, said it would spin out to become an independent firm.

Lewis and Merrill Lynch chairman and chief executive officer John Thain failed to shed further light on the future of its alternative investment arms, but said Merrill’s wealth management businesses would keep their name and stay “in tact.”

Private equity firm JC Flowers advised on the deal, according to Lewis, after previously conducting due diligence on Merrill Lynch. The firm was one of the “key ingredients” in ensuring such a quick deal, Lewis added.

In fall 2007, Merrill Lynch held talks with TPG to discuss a possible capital injection into the bank. Eventually the bank received $12.2 billion in funding from a consortium of investors including Mizuho, the Japanese bank, Korea Investment Corporation, the South Korean sovereign fund and TPG-Axon Capital, a TPG affiliate. 

Merrill Lynch Private Equity is currently raising a $6 billion fund, The Wall Street Journal reported in August.