Maybe this is the way that buyout firms take advantage of distress in banking: by clubbing up to take minority stakes.
Federal Deposit Insurance Corp. rules limit private equity firms’s freedom of action in dealing with regulated financial institutions, but in two cases in May, pairs of firms were named in deals to shore up the finances of ailing institutions.
By keeping their stakes under 25 percent, the firms can skirt some of the regulators’s most onerous restrictions, but they don’t get control. So while exits may be easier, the arrangements also may raise questions about the firms’s upside opportunity.
The two deals involved troubled institutions on opposite sides of the country: Sterling Financial Corp. (Nasdaq: STSA), a $10.5 billion-asset thrift holding company in Spokane, Wash., and Hampton Roads Bankshares Inc. (Nasdaq: HMPR), a $3 billion asset banking company in Norfolk, Va.
Each firm would invest $139 million and together would hold an ownership interest of about 40 percent of Sterling Financial. The latest deal allowed Warburg Pincus to take on half of the commitment that TH Lee had taken on in the deal that Sterling Financial announced May 3, while allowing TH Lee to reduce its exposure under the 25 percent FDIC-enforced cap.
Under the terms of the revised deal, Warburg Pincus and TH Lee each would own common stock, Series B participating voting preferred stock and warrants representing approximately 20.5 percent of Sterling Financial.
David A. Coulter, a Warburg Pincus managing director and co-head of Warburg Pincus’s financial services practice, would join the Sterling Financial board of directors. He would join previous appointees Les Biller, the former vice chairman and chief operating officer of Wells Fargo & Co., as chairman of the board and Scott Jaeckel, a managing director at TH Lee, as a member of the board.
Sterling Financial’s stock was already trading below $1 per share when it announced in March that it was looking for ways to fortify its capital structure, which had been damaged by loan writeoffs from the collapse of the West Coast housing industry. Warburg Pincus had been involved in the earlier talks, said a source close to the discussions, but walked away because of concerns about the commitment of Sterling Financial’s management to follow through on promises to reform its business practices.
However, the firm re-evaluated its position after Sterling Financial brought in Biller, who had had a long acquaintance with Coulter from the days when Biller was at Wells Fargo and Coulter was variously at Bank of America Corp. as chairman and CEO and vice chairman of JP Morgan Chase & Co.
In the other transaction, Hampton Roads Bankshares announced on May 26 that The
But industry watchers believe that the purchases may not be as lucrative as they look, with returns being limited in the case of most deals. “The private equity guys are used to probably a 20 percent to 30 percent rate of return and I think if they get a really good deal they may hit that target,” Prof. Lawrence White of the Stern School of Business at New York University, told Reuters, the publisher of Buyouts. “But more likely I think they’ll get 10 percent to 15 percent return on capital.”
A similar phenomenon may be beginning to take root in the heartland as well, although without the club-investment dimension, according to the Federal Register. Goldman Sachs Group Inc. has asked for Federal Reserve approval to buy up to 24.9 percent of SKBHC Holdings LLC, Corona del Mar, Calif., which in turn is applying to become a bank holding company so it can take over tiny, but well capitalized, $17.9 million Starbuck Bancshares Inc., in Starbuck, Minn.
Goldman Sachs would not comment on the application, and SKBHC could not be located. The apparent plan, however, is to use Starbuck Bancshares as a platform for future bank deals. Mark Olson, the president of First National Bank of Starbuck, told the local paper, the Pope County Press, that the new holding company, run by a group of well-established bankers whom he did not name, had bigger plans.
SKBHC “gets the national bank charter, which is what they want, and it’s quicker and most likely less expensive to buy a small national bank rather than to start from scratch to acquire a national bank charter,” Olson said.