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Merrill Ramps Up Private-Equity Push

Dan Freed

Merrill Lynch(MER Quote) is raising a $6 billion private-equity fund, according to an investor pitched earlier this year, as part of CEO John Thain's effort to increase the firm's presence in this area.

Merrill will reportedly contribute between $1 billion and $2 billion of its own capital to the effort, which the investor described as a "global opportunity fund," suggesting that it has the ability to invest in a range of assets and industries across the globe. Merrill hopes to raise the rest of the money from outside institutions, allowing it to collect management fees without risking so much of its own capital.

Merrill also pitched a $3 billion to $4 billion infrastructure fund late last year and two separate real estate funds: one that will invest in Asian property and one that will focus on European property, the investor says.

Other large investment banking institutions, including Citigroup (C Quote), Morgan Stanley (MS Quote) and Credit Suisse (CS Quote) are constantly getting in and out of private equity. One major reason these firms are reluctant to raise their own funds is they don't want to upset their private-equity clients, who don't like competing with them for acquisitions.

Goldman Sachs(GS Quote), where Thain spent most of his career prior to running NYSE Euronext(NYX Quote), has done the best job of walking this tightrope between advising private-equity clients on acquisitions and doing its own private-equity investing.

Merrill executives have said publicly that they plan to step up their private-equity activities, but they have not revealed many details, except that the firm has contributed $700 million to a Pacific rim real estate fund it hopes will attract another $2 billion or so from outside investors.

The Wall Street Journal wrote in an April 18 interview with Thain that the investment bank "plans to make at least two more big investments, one in Latin America and one in Europe." And on April 13, Dow Jones Chinese Financial Wire quoted Damian Chunilal, head of Merrill's Pacific Rim origination, saying that infrastructure, real estate and private-equity funds are also on the drawing board.

Dick Bove, an analyst at Ladenburg Thalmann, says the private-equity strategy is a good one, particularly if it targets money from investors outside the U.S. who want to take advantage of the weak dollar and the fact that many U.S. financial institutions are trading below book value.

"If you have euros or rupees or yuan or pesos and you're looking at asset values that are above the market value of the companies you're looking at, this is a candy store," Bove says.

While a Merrill Lynch executive says the firm's private-equity investing strategy is drawing heavily on money from outside the U.S., it is not clear how much of the investment will take advantage of the cheap dollar and the weak state of U.S. financial companies.

The infrastructure fund, for example, will invest in government-owned assets such as roads, bridges and utilities. Such investments have become very popular of late, following the success of Macquarie Bank of Australia, a pioneer in infrastructure deals. But the jury is still out on whether these funds will be able to meet their targeted returns, or whether they will turn out to be another dangerous fad, much like the frenzy for securitization that became the undoing of Stanley O'Neal, Thain's predecessor.

Calls to Merrill executives, including Nate Thorne, who will manage the $6 billion private-equity vehicle, were referred to a spokeswoman, who declined to elaborate on the public statements made by firm executives.