THE IRISH-LED consortium of private investment firms seeking to buy into Bank of Ireland (BoI) and possibly Irish Life Permanent (ILP) in a merged group has told the Government it would be able to lend up to €60 billion to small businesses over five years through the banks.
The Mallabraca consortium, which comprises US private equity giants JC Flowers, the Carlyle Group and a number of Middle Eastern sovereign wealth (state-controlled) funds, is willing to invest up to €5 billion buying into BoI, though its preference is for a stake in a married entity comprising BoI and ILP, two of the State's top-three mortgage lenders. The consortium has also signalled to Government it would be willing to invest more money taking a significant stake in Anglo Irish Bank as well, bringing potential investment to €7 - €8 billion.
Private equity firms tend to seek a substantial return on their investments over a short-term period. However, the Mallabraca consortium has told the Government that JC Flowers and Carlyle Group would be willing to remain investors in any Irish bank for between five and 10 years.
It has also told Government officials the consortium could provide up to €60 billion - sourced by the group's investors through deals in the international money markets - in new loans to small and medium-sized businesses over the next five years.
The consortium has not yet made any public comment on its intentions to invest in BoI or other Irish banks.
Minister for Finance Brian Lenihan is believed to have met Christopher Flowers, the billionaire investor behind JC Flowers, in Dublin last week.
Speaking on RTÉ's This Week programme yesterday, Mr Lenihan said the Government had not ruled out making a State investment in Irish banks, but said the institutions had to show a capacity to attract investment. However, he repeated State investment in the banking system was a last resort and it was entirely legitimate that the taxpayer should not be asked to invest fresh capital.
Mr Lenihan said the core concern was not just the banks' survival but that they can provide money to the economy through legitimate lending. He said borrowing would ensure the economy would be stimulated.
The Minister said the Government would welcome private investment in banks on terms that serve the public interest. The Mallabraca consortium is keen on the State co-investing in the banks with the private equity grouping in a deal that could involve the Government investing €1 - €3 billion.
The consortium is seeking preference shares in the banks which would be converted into ordinary shares within five years. This would lead to the value of stakes held by existing shareholders being diluted.
However, if the consortium makes an investment, it is expected to offer existing shareholders an opportunity to re-invest through a rights issue where new shares are issued at a later date.
The Mallabraca consortium held meetings with BoI last Friday as the bank issued a statement saying it had received "unsolicited approaches from a number of parties wishing to make an investment in the group".
Further meetings between the bank and the consortium have been scheduled for this week.
The Minister signalled last Thursday in private meetings with the guaranteed Irish banks and building societies that he intended to strengthen the banking sector through reform and consolidation.
He has asked the institutions to reflect on their discussions last week and to report back this week in further meetings with the Minister.
Several other US private equity companies, including Texas Pacific Group and Kohlberg Kravis Roberts, are also separately assessing investments in Irish banks.
Investment in banks by State not ruled out, says Lenihan; Business Opinion - John McManus: page 18