Investment banking revenue from private equity down 68%

Fees generated from private equity-sponsored buyouts and other transactions are at their lowest level since 2003; First Reserve replaces Blackstone as the top revenue source for investment banks.

Investment banking revenue generated by private equity sponsors has reached its lowest level in five years, according to a study by data provider Dealogic.

For the first half of 2008, global investment banking earnings from financial sponsors – the fees and other income investment banks collect from private equity firms for services such as acquisition advising and leveraged loan financing – totaled $3.3 billion (€2.1 billion).

That figure represents a 68 percent decline from the $10.3 billion the industry generated in fees for the same period last year, and is the lowest first half total since 2003 when investment banks earned $3.2 billion from private equity firms.

The decline in investment banking revenue has been directly affected by the credit market turmoil, which saw the number of mergers and acquisitions decline significantly since last summer. According to Dealogic, global financial sponsor buyouts are down 76 percent from the same period last year, and investment banking revenue from merger and acquisition services dropped from $2.1 billion to $1.2 billion over the same period.

The drop off in leveraged loan financing was even more acute, from $5.3 billion in 2007 to $1.4 billion in 2008. So far this year, merger and acquisition and leveraged loan financing have respectively comprised 35 percent and 34 percent of investment banking revenue generated by  financial sponsors.

Despite the decline of the buyout market, the report reveals the rising prominence of the energy sector as a target of private equity activity.

Dedicated energy specialist First Reserve led all financial sponsors by generating more than $150.7 million in revenue for investment banks during the first half of 2008.  Apollo Advisors and the Carlyle Group trailed the Greenwich-based firm at $120 million and $119.2 million, respectively.

On an industry by industry breakdown, the energy and natural resources sector led all others with $638 million in investment banking fees. Industrials and media-related fields finished second and third, respectively.

In a microcosm of the shifting activity within the industry, First Reserve beat The Blackstone Group to the title of biggest investment banking fee generator. Last year, Blackstone paid more than $412 million in fees; this year the firm didn’t make the top 10.

Goldman Sachs led all investment banks in financial sponsor-related revenue, capturing an 8.7 percent market share. Credit Suisse and JPMorgan followed with 7.1 percent and 5.8 percent, respectively.

For more analysis on the rise of the energy sector in private equity, catch the energy supplement in this month’s Private Equity International magazine.