The chief executive of JP Morgan has criticised the increasing provision of equity bridges, calling them “a terrible idea” and “bad financial policy”.
Investment banks have been increasingly willing to provide equity bridge facilities – where they finance part of the equity stake on a large buyout to help their private equity client close a deal, and then syndicate this to other investors later – as they look to grab a bigger share of the lucrative leveraged loan market.
However, Jamie Dimon of JP Morgan – the biggest lender to private equity firms, according to Dealogic – said his bank had deliberately limited its exposure in this area. As the bank reported its second quarter results yesterday, he said: “I think equity bridges are a terrible idea. They’re bad financial policy, and they’re not good for banks or the private equity guys.”
Equity bridges are just not worth the risk, he said. “There’s only so much you can do and feel comfortable with them. It’s silly to take all that downside risk and not have any upside potential.”
Bridge equity is considered more risky than loans, because equity owners are behind lenders in the queue for repayment if the investment goes wrong.
In addition, the recent jitters in the credit market, prompted largely by the crisis in the US sub-prime mortgage sector, have made it more difficult for banks to syndicate this equity – leaving the risk stuck on their balance sheet. Dimon admitted that JP Morgan had been forced to make some write-downs on the loans that it has made rather than trying to sell them on in a difficult market.
JP Morgan is one of seven banks that have provided equity bridge facilities to Kohlberg Kravis Roberts to finance its £12 billion takeover of UK health and beauty chain Alliance Boots.
However, Dimon hopes they are a short-lived phenomenon. “I hope they go the way of the dinosaur,” he said.
But in general the bank took a broadly optimistic view of the current climate, suggesting that “deals are getting done” and that “there is financing happening out there”. Equally, the leveraged loan and US sub-prime sectors were relatively small parts of an economic picture that remained fairly healthy overall, Dimon said.