PE firms concerned bank rules unlikely to change

Controversial rules imposed in August by U.S. regulators to govern private equity investment in failed banks are unlikely to change as they come up for a planned six-month review, private equity executives predict.

The Federal Deposit Insurance Corp. (FDIC) has been conversing with PE firms about their impact, but industry executives said they did not expect the regulator to make any major changes to the rules.

Several of the FDIC’s guidelines, such as the capital levels required and the ownership period needed, were seen by the industry as too restrictive and put private equity at a disadvantage in bidding against banks.

Late last week, David Bonderman, co-founder of giant private equity firm TPG, said that regulators are accelerating bank failures by limiting private equity firms’ ability to buy into and reorganize struggling banks.

But Bonderman said firms that specialize in turning around failing enterprises are precisely the medicine such banks need.

“Sooner or later the Feds will get the idea that the way you get capital into the system is to attract it, not to repel it, and make rules that reward capital and not the other way around,” he said.

Private equity acquisitions of troubled banks since the rules were introduced have been scarce. However, prior to last August, notable bank acquisitions by PE firms include the purchase of BankUnited, a failed Florida bank, by a consortium of buyout shops that included The Blackstone Group, The Carlyle Group and WL Ross & Co.

Another struggling bank to get acquired last year was IndyMac, whose deal was valued at $13.9 billion. Also, First Southern Bancorp Inc., the parent company of Boca Raton, Fla.-based First Southern Bank, reached an agreement totaling $450 million from Crestview Partners, Lightyear Capital and Fortress Investment Group.

Still, the industry has in some respect learned to live with the rules enacted last fall and the FDIC appears to be becoming more open to allowing private capital in after its initial reluctance as bank failures surge, experts said. Indeed, the number of private equity bank investment deals will likely increase as more banks fail, they predict.

“It would seem to indicate that they may be getting more comfortable with PE bidders as long as they pass all the other tests,” said Joseph Vitale, a bank regulatory partner at law firm Schulte Roth & Zabel. “It may be that we are going to see greater frequency of these deals now.”

The number of “problem” U.S. banks jumped 27% during the fourth quarter of 2009 to 702, the highest level since 1993 and a sign that the industry’s recovery remains uneven.

Regulators have closed 20 U.S. banks so far this year and 185 since January 2008. The failures have strained the FDIC’s resources, sinking its insurance fund to a negative $20.9 billion at the end of the year.

Private equity firms with billions at their disposal could be an attractive source for fresh capital. They have been chomping at the bit for an entry into a distressed sector that promises large returns, but have been held back by the FDIC’s rules.

The rules put the capital requirement for private equity investments at a higher level than that expected of banks. It means private equity is at a disadvantage when bidding next to a strategic bidder such as a bank. Over the last six months, private equity firms have been outbid in a few auctions, one executive said.

The FDIC has so far not held a process to get external comment on the rules, one of the executives said. It is also seen unlikely that it will conduct a repeat of a roundtable event it held prior to introducing the rules in the summer, when members of the private equity community were asked for their views, that person said.

Instead, it has been interacting with firms on a regular basis since making the proposals, executives said. That has become more involved as it approached the six-month mark and a number of firms made inquiries about the status of the rules.

“We are considering whether any action is appropriate,” said an FDIC spokesperson. “No decisions have been made to this point.”

After the May 2009 acquisition of failed Florida lender BankUnited by a group of private equity firms, investors found it hard to buy failed banks.

BankUnited and IndyMac were large institutions and drew little or no interest from other banks, and the FDIC’s losses would have been large without a deal.

But the FDIC does appear to be getting more comfortable with letting private capital into banks. Since late January, the regulator has sold at least three failed banks to institutions backed by private investors.

OneWest Bank, formerly IndyMac, bought La Jolla Bank, with $3.6 billion in assets last month. The deal, OneWest’s second, came on the heels of its acquisition of California’s First Federal Bank in December.

In late January, Bond Street Holdings, a newly formed bank holding company backed by a group of investors, bought two small failed banks in quick succession.

The targets were Premier American Bank, a Miami-based bank with around $350.9 million in assets, and Florida Community Bank, an Immokalee, Fla.-based bank with about $875.5 million in assets.

Alastair Goldfisher contributed to this report.