Castle Creek Sets Up Funds For TARP Play

The Rancho Santa Fe, Calif.-based buyout firm has set up a group of specialized funds to invest in the preferred stock of banks that participated in the Troubled Asset Relief Program, the U.S. Treasury Department’s 2008 effort to shore up banks’ capital structure during the Great Recession.

About a year ago, the Treasury Department took steps to wind down TARP, getting banks either to repurchase the shares issued to the government by the banks or selling those shares to third parties, Tony Scavuzzo, a director at Castle Creek, told Buyouts. “We looked at that as a unique opportunity to allow banks to keep the capital” with Castle Creek on board as a friendly investor.

So far, the Treasury Department has held about 100 TARP auctions and plans 150 more before the program comes to an end next year, Scavuzzo said. Castle Creek has invested in more than 25 banks around the country through this program.

Castle Creek—a specialist in making private equity investments in community banks with less than $10 billion of assets—has set up at least two specialty TARP funds, each with a single investor, which operate as separate-account vehicles. These funds operate independently of the firm’s flagship fund, Castle Creek Capital Partners IV LP, which closed with $331 million of commitments in February 2011.

One such fund, Castle Creek TCU TARP Special Situations Fund LP, closed last May with a $15 million commitment from Texas Christian University, according to a regulatory filing. Jim Hille, the CIO at TCU, said the school’s $1.2 billion endowment is 57 percent allocated to alternatives, including a 20 percent allocation to private equity.

Although TCU was not in Castle Creek’s main fund, the school knew the firm through previous contacts, Hille said. “This was more interesting to us than the plain-vanilla bank fund.” And the school was able to work with Castle Creek to develop a portfolio of bank assets through the Treasury Department’s auction process, Hille said. “They won some, they lost some, but we basically got what we wanted.”

Castle Creek launched a similar fund, Castle Creek AZ TARP Special Situations Fund LP, in June with a $30 million commitment from a single investor, according to a regulatory filing. The Arizona Public Safety Personnel Retirement System disclosed that it was the investor in that fund.

With TARP preferred stocks offering 5 percent current yields, the Arizona pension fund, which is an investor in the firm’s Fund IV, decided to go for the special program, said Mark Steed, private equity analyst at the Arisona pension fund. “We have to be on the lookout, in a low-yield environment for anything that will provide an attractive yield.”

And by working with individual investors, the firm can tailor its TARP investments to meet a variety of investment theses, said Sundeep Rana, a director at Castle Creek. “Different investors have different objectives and return goals,” Rana said. “Each investment mandate benefits from customization.”

Scavuzzo added: “You have to have true operational experience to add value to the banks that you invest in.”