All the news - plus an insider's take - on SuperReturn 2008

Private equity firms are turning their backs on the banks and going directly to funds in the Middle East and Asia to raise money for deals.

Guy Hands, the British financier and founder of Terra Firma, the private equity firm, said that the credit crunch had hit banks so hard that they would, over time, be left out of the financing process.

Mr Hands said that Terra Firma had started to hire debt specialists from investment banks and was sending them to the Middle East in search of fresh capital.

"As banks refuse or are unable to underwrite megadeals, we will start having to raise our own debt directly from pension funds, sovereign wealth finds and even the global money markets," Mr Hands told an audience of investors at the industry's annual conference in Germany.

He said that some of the big US firms, such as Blackstone, Carlyle and KKR, were already replacing the banks and raising money directly.

"Over time, for megafunds, the ability to raise debt will become as important as their ability to execute restructurings and company transformations," he said.

Mr Hands said that it was still possible to raise about £500 million for deals, but he added that the market would get squeezed further as banks pulled back their lending in the face of huge credit-related writedowns.

"To date the banks have only declared a fraction of the sub-prime they will ultimately suffer," Mr Hands, a former banker with the Japanese bank Nomura, said.

"Some have simply marked to market various investment vehicles. The paper gains associated with these vehicles have been erased but, in fact, not everyone has even gone this far — and hardly anyone has actually started to realise true credit losses."

Mr Hands said the banks were split into two groups. Those, such as Morgan Stanley and Goldman Sachs, that have historically focused more on giving advice as opposed to financing were still in the running and being supportive to private equity.

"They're eager to get the deal done," he said. "So they're being more supportive because they want to get the advisory fees."

But others, who have focused more on financing, will get left behind. He declined to name any such banks, although sources have said that Mr Hands's relationship with Citigroup, in particular, has been sorely dented after the US bank tried to pull the financing for Terra Firma's acquisition of EMI.

Mr Hands said that the crunch was not just a "cyclical blip" that would work its way through the system over time.

Instead, he said: "It signifies a structural change taking place in the financial markets which will make life substantially harder for all of us in private equity for years."

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax