Fed Rule Easing Only Goes So Far For Buyout Firms

The Federal Reserve has relaxed bank ownership rules, but it only goes so far in solving existing problems — banks will not get all the capital they need, and private equity firms will not get the control positions they seek.

Senior private equity executives said while the move was a step in the right direction and helpful, it did not give buyout firms control of an asset — fundamental for most private equity investments.

“The Fed has loosened rules on investing in banks so you can have a higher percentage, but you still can’t have control,” said Gary Talarico, managing director at private equity firm Sun Capital Partners.

“We’re control investors and not controlling a financial institution has given us pause,” said Talarico, speaking at the Reuters Restructuring Summit in New York.

Changes the U.S. Federal Reserve announced include allowing an investor to buy up to a 15 percent voting stake instead of the previous 9.9 percent limit. Investors can also buy up to 33 percent total equity interest, including voting and non-voting shares, instead of the 25 percent prior limit.

The Fed also outlined circumstances in which a minority investor might have two seats on a bank’s board without being seen as wielding control over management.

“Realistically it makes it much easier for private equity to lead a recapitalization, that’s the key,” said Howard Newman, president and chief executive of New York-based private equity firm Pine Brook. “Private equity’s role here is to validate the value of the bank and to lead the recap and this makes it easier because you can play a larger role.”

But Newman said that while this addresses one problem, it was not the fundamental ones facing the financial industry.

“It’s a very good and constructive step that will help bring private equity to the table to validate the rest of the solution,” he said.

The Fed has long maintained a tight leash on banks and required extensive disclosure of their activities, to help keep the banking system stable.

Private equity firms are increasingly looking to help bail out the banking system, but do not want to buy such large stakes in banks that they become regulated bank holding companies. Being such a company could hinder a private equity fund’s stakes in other unrelated sectors.

Paul Lee, partner at Debevoise & Plimpton and Chair of the law firm’s banking group, said the greater regulatory flexibility comes at a time when the market uncertainly makes it more difficult for investors to be making decisions on where to put their money.

“It is an important improvement but it has to be weighed against the fact that market conditions are such that there may still be some reluctance among some investors to take full advantage of this,” said Lee.

By Megan Davies

(Additional reporting by Dan Wilchins and Paritosh Bansal in New York; Editing by Bernard Orr)