PARIS (Reuters) - French investment bank Rothschild is planning to launch a 400 to 500 million euro (394 million pounds) fund that would lend to small and medium-sized European companies, moving to fill a void left by retrenching banks, an executive of the firm said on Friday.
The fund is emblematic of how asset managers, private equity firms and insurers are trying to make good a retreat by banks, whose risk aversion has led to a reduction in their traditional role as the main source of funding for smaller companies.
For Rothschild, controlled by holding company Paris Orleans PROR.PA, the fund - to launch in September - is an opportunity to boost its merchant banking business at a time when M&A advisory work has been scarce.
Rothschild posted a 9 percent drop in annual advisory income for the year through March, a sign of pressure on the boutique even as it has avoided some of the problems faced by bigger rivals in investment banking.
European companies relied on banks to provide some 80 percent of their funding as recently as 2010, according to figures from the French banking federation. Tougher capital rules are forcing many banks to scale back, but fundraising via share or bond issues remains daunting for many smaller companies.
“Since the banks - because of Basel III - are finding themselves with liquidity and capital costs that are prohibitive, they are going to continue to reduce their exposure to these kind of clients,” Marc-Olivier Laurent, senior managing director of Rothschild’s Merchant Bank, told Reuters.
“That’s what brought and attracted us to this area, because there are going to be vast needs,” he said, adding that the fund would specialize in high-yield debt.
The fund, run by Rothschild’s merchant banking unit, has already hired Edouard Veber from JPMorgan Chase (JPM.N), who specialised in mezzanine funds, Laurent said, and is recruiting another executive, part of what head hunters say is spate of hiring in the “shadow” banking arena.
Rothschild, which in July said it has raised 259 million euros for a European mid-cap secondary private equity fund, is confident that the debt fund will get a strong reception from yield-hungry investors, Laurent said.
As a boutique advisory firm, Rothschild does not lend directly to companies, but it has in recent years boosted its debt advisory and restructuring business, which has advised companies such as French transmitter operator TDF and German utility maker Elster Group on debt restructurings.
While the target client of the debt fund is smaller than those - companies worth between 100 and 600 million euros - it may benefit from referrals from the debt advisory unit, Laurent said.
“We’ve seen a lot of opportunities in the last two years in this type of yield, this type of credit, investments that present interesting risk-reward propositions,” he said. “Today we lack the tools to do that, and we really wanted to capture that deal flow.”
Laurent said the fund would be looking to offer investors a return “in the low teens”.
The Rothschild venture is the latest in a series of initiatives aimed at partially filling a vacuum in bank funding. French bank Societe Generale (SOGN.PA) for instance said in May it was teaming up with Europe’s No. 2 insurer AXA (AXAF.PA) to offer funding to small-to-mid sized companies.
German insurer Allianz (ALVG.DE) has also said it aimed to double the volume of its asset-backed lending in coming years.
Additional reporting by Matthieu Protard; Editing by David Holmes