Planned regulatory changes prompt HSBC unit MBO

HSBC Specialist Investments (HSIL), the infrastructure and real estate arm of British bank HSBC, is in talks with the bank about completing a management buyout that would it see it become an independent entity, HSBC Infrastructure Company said in a statement.

The deal, which is expected to be completed by the end of 2010, would leave the bank with a 20 percent stake in HSIL, which manages some $4 billion of assets in infrastructure and real estate. The buyout would not affect HSBC’s stakes in the funds HSIL manages, with the bank expected to continue to be a significant investor in HSIL’s future funds.

While HSIL is the largest of HSBC’s private equity divisions, the bank said in a statement that it is also holding talks with the “management teams of its private equity fund management businesses in Hong Kong, USA, Canada and the Middle East which are expected to lead to five separate management buyouts”.

The buyouts are largely seen as a move to pre-empt expected regulatory changes that will impact banks’ ownership of private equity vehicles.

Although discussions are still ongoing and there is no official requirement for HSBC to sell off its private equity businesses, proposals such as the US’ Volcker rule, which could see banks having to choose between running private equity operations and taking deposits, are seen as a sign of a changing regulatory environment.

A recent study published by the Harvard Business School and INSEAD has found that bank-affiliated private equity funds, which usually enjoy better financing terms, tend to exacerbate the cyclicality of private equity investments. This means that investments made by bank-related funds, especially deals done in peak years, tend to underperform slightly when compared to other deals in the market.

This leads the study’s authors to conclude that, “overall, the cyclicality of bank-affiliated transactions, the time-varying pattern of the financing benefit enjoyed by affiliated deals, and the generally worse outcomes of these deals done at market peaks raise questions about the desirability of combining banking with private equity investing”.