Friday letter: Assets? Yes please. Staff? Not so much

While the GE Antares business has potential bidders lining up, suitors of GE Capital’s European leveraged finance operation will want to buy the €6 billion loan portfolio rather than the business itself.

The dismantling of GE Capital, and the sale of its sponsored finance unit especially, have gained a lot of traction in a short period of time. Apollo, Ares, GSO Capital Partners, KKR, Mitsubishi UFJ, SunTrust Bank and Wells Fargo have all been flagged as potential bidders for various parts of the business. 

Most of these names, aside from Wells Fargo, have been tied to the US sponsored finance unit. This includes GE Antares, which many consider the jewel in the crown. 

Wells is said to be mainly interested in the lower risk, lower return asset-based lending and leasing business lines. It has already scooped up a $9 billion portfolio of performing first mortgage commercial real estate loans in Canada, the US and the UK. 

According to market sources, the US sponsored finance unit could be the only part of the GE Capital business that gets sold as a full business. For the other parts, including the European leveraged finance unit, taking on the firm’s full headcount would be a tall order for most buyers. 

A bank buying the European business is all but impossible, according to market sources. Regulatory opposition to the leveraged finance sector means that banks not already active in this market have little incentive to get into it now, while those that are active as already leveraged lenders may be interested in GE’s portfolio assets, but will have no need for the associated extra headcount (especially when there’s such a good opportunity now to poach the firm’s best talent, rather than buying it wholesale). 

Neither will any purchase be a slam-dunk for a fund manager. With its banking license from parent GE, the financing business has a much lower cost of capital than credit funds. To be competitive, a fund will have to team up with financial institutions such as an insurer. Ares is rumoured to have done just that; it is said to be co-operating with Macquarie on a bid for GE Antares.

Because of the cost of capital issue, it is much more likely that a buyer would seek to acquire the portfolio and a few key employees, instead of buying the whole business. For it’s the assets – and the quality relationships that come with them – that buyers are keen to get their hands on.

And there’s already a precedent for GE closing the business and selling the assets. In tandem with announcing its plans for GE Capital, the corporation disclosed that it had sold $26.5 billion of real estate assets to Blackstone, Wells Fargo and one other undisclosed buyer. The staff let go from GE’s real estate unit as a result of the deal were paid one week’s severance for each year served, PDI understands. 

Shedding its banking business may yet turn out to be great move for GE, and also for smart buyers of some of its assets. For many GE Capital staffers on the other hand, the outlook seems rather bleak.