Thursday, June 24, 2010

PE Bank Strategy: Acquire lenders that are still in business


Moelis, Carlyle Target Live Lenders as FDIC Deters Dud Buyouts

June 24, 2010, 12:18 AM EDT

June 24 (Bloomberg) -- Buyout firms thwarted by regulators from taking over failed banks have found a solution: Acquire lenders that are still in business.

By Dakin Campbell and Jonathan Keehner

Moelis Capital Partners LLC, Thomas H. Lee Partners LP and the Carlyle Group are among firms that agreed to buy stakes in at least five U.S. banks since April. While most are small, with assets of less than $1 billion, their status as banks means they can buy more distressed lenders that can be merged and sold later -- a tactic that made some private-equity investors billionaires in the 1990s.

Buyout firms are changing targets in part because the Federal Deposit Insurance Corp. is reluctant to let them control collapsed banks on concern they’ll take on too much risk with insured deposits. Even as banks failed this year at the fastest pace since 1992, the agency awarded private investors just two of the 83 lenders that it shuttered. The rest were sold to banks that already had charters and track records.

“Private-equity firms are interested in open-bank deals out of frustration,” said Konrad Alt, a San Francisco-based consultant at Promontory Financial Group who was a regulator at the Office of the Comptroller of the Currency from 1993 through 1996. “They are anxious about missing their opportunity.”

Bank deals offer a chance for private-equity firms that must spend about $500 billion in unused capital or risk being forced to return the funds to investors and forgo fees they charge for managing and selling assets. The investments could also defray costs to the FDIC insurance fund, making it less likely the agency would have to increase its levy on banks or draw on the U.S. Treasury Department’s $500 billion credit line. In the past 13 months, the FDIC has levied a special assessment and asked banks to prepay three years worth of fees.

Bonderman Erased

Buyout firms got a warning about the risks of taking stakes in operating banks after David Bonderman’s TPG invested in Washington Mutual Inc. in 2008, only to get wiped out, losing $1.3 billion, five months later in the biggest banking failure in U.S. history. WaMu was later acquired by JPMorgan Chase & Co. After that, the buyout firms tried to buy failed lenders and persuade the FDIC to share losses on loans, something the agency has agreed to do in acquisitions by banks.

Sheila Bair’s FDIC did allow a group including Carlyle and the Blackstone Group LP to buy the failed BankUnited Financial Corp. last May and inject $900 million. The regulator deterred more purchases by requiring private-equity firms to maintain higher capital ratios and prohibiting sales of banks for at least three years. The only private investor that navigated the process this year was Bond Street Holdings LLC, which bought two failed Florida banks in January.

Management Revamp

One advantage of funneling initial investments into open banks is that quality managers remain while poor management teams are removed, Michael Krimminger, a special adviser for policy at the FDIC, said in a June 11 interview.

“The FDIC doesn’t have to worry about whether an open bank can hit the ground running,” Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut Law School in Hartford.

Among recent transactions, Angelo Gordon & Co., the New York-based firm that raised $1.1 billion to invest in distressed firms, asked regulators for permission to invest in Georgia’s Hamilton State Bancshares Inc. Hamilton, with deposits of $227 million at six branches, plans to use a portion of the private- equity money to buy “failed or distressed depository institutions,” according to a statement.

At Patriot Financial Partners, a Philadelphia-based firm scouting for open banks, the aim is “to find good management teams in markets where they can grow,” managing partner Kirk Wycoff said in a June 11 interview.

Gerald Ford’s Investment

“By providing banks with additional private capital, we can help them resolve loans and take advantage of consolidation opportunities,” said Wycoff, whose firm is backed by Philadelphia real estate investor Ira Lupert.

After bidding unsuccessfully on several lenders seized by the FDIC, billionaire investor Gerald J. Ford decided in April to invest $500 million in Pacific Capital Bancorp, a money- losing lender with 48 branches based in Santa Barbara, California.

Moelis Capital Partners LLC, the private-equity arm of Kenneth Moelis’s boutique investment bank, applied to buy a stake in Opportunity Bank, a Texas lender with assets of $64 million, according to the Federal Reserve’s website.

In May, THL Partners agreed to pay $134.7 million for a stake in Sterling Financial Corp., a Spokane, Washington-based lender. Funds backed by Carlyle and Anchorage Advisors LLC agreed last month to buy about 46 percent of Norfolk, Virginia- based Hampton Roads.

Treasury Approval

In at least three cases, the shift in tactics requires approval from the Treasury, which owns stakes in small banks through its injection of U.S. bailout funds. Capital infusions for Pacific Capital, Hampton Roads and Sterling are all contingent on the government writing down its investment.

The operating-bank transactions mean “there is less reliance on the loss-sharing arrangements from the FDIC,” said Jay Langan, who leads Deloitte & Touche LLP’s financial services merger & acquisition group.

Regulators are less likely to oppose investor windfalls as long as government asset guarantees aren’t involved, said Steven Kaplan, a finance professor at the University of Chicago’s Booth School of Business. “It’s much less likely to be politically perilous,” he said.