peHUB Wire: Friday, May 29, 2009

Yesterday FDIC Chairman Sheila Bair provided a relatively fruitless update on the FDIC’s plans for future private equity investments banks. It’s been a week since four buyout firms took control of BankUnited, the second-costliest bank to fail in the financial crisis, and almost a year since J.C. Flowers and crew took over IndyMac, the most expensive bank failure of the crisis. Yet with the bank investment regulations unchanged, the issues over control, regulation, and risk-bearing on such deals haven’t been addressed. More than 300 banks could fail, according to the FDIC’s “problem list,” but buyout firms, ready to deploy capital, are no closer to knowing how to proceed.

Earlier this week I spoke about these issues with Kevin Petrasic, former special counsel at the Office of Thrift Supervision, currently of counsel in the Banking and Financial Institutions Group at law firm Paul Hastings. A few takeaways:

1. Right now, the Federal Reserve, the Office of Thrift Supervision, The Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation all have their own specific guidance for bank investments. This overlap makes the prospect of buying a bank all the more complicated. Petrasic said consolidation between regulatory bodies is one way to provide greater guidance for private equity banking investments, but such an overhaul would take years. In the short term, the best private equity can hope for is interagency coordination and joint guidance.

2. Another big issue is flexibility. Sheila Bair said she hopes to create some “generic rules.” But Petrasic noted that every bank is in a very specific situation, which requires a unique set of terms. “The real challenge is that there has to be flexibility and consistency in the new guidelines,” he said.

3. Buyout firms have been vocal on their desire to purchase controlling stakes in banks. With less than 25% ownership they’re currently permitted, they can’t oust underperforming management in the hassle-free manner with which they’re accustomed. Could the government choose to simply do away with the 25% ownership ceiling? Petrasic said it’s doubtful. That would require a statutory change, and “folks on the Hill have strong views regarding the mixing of banking and commerce,” he said. The trick is to somehow change the stake ceiling without running afoul those opinions, he said.

4. The other issue is that of receivership. As it stands, buyout firms aren’t incentivized to invest in banks before they enter receivership. Investing after the FDIC steps in is more attractive since the FDIC offers loss sharing after a bank is in receivership. Unfortunately, the FDIC cannot provide a benefit to shareholders and bondholders on an open bank unless it’s large enough to pose a “systemic risk.” That rules out a lot of middle market action on many of those 300 “problem banks.”

*** Even though global M&A for May was down 38% over last year, telecom deals, which increased by 22% globally over May of last year, drove M&A this month. Here’s the Thomson Reuters deals snapshot from yesterday.

***With recent chatter about wildly shrinking VC fundraising numbers, it’s helpful to take a step back and look at the difference between the numbers initially released by the NVCA and the actual data the association later reports. According to observations from investment bank VC Prive, the number typically rises significantly. Firm founder Laura Roden says, “The chilling numbers for Q4 2008 and Q1 2009 VC fundraising should be taken with a modicum of expectation that these numbers will almost certainly improve upon later reflection.” Download her comparison spreadsheet here.

***Random meme: The editors of the Financial Times have an official favorite word—a search for “spectre” on yields 1526 articles.

Top Three

The Federal Deposit Insurance Corp, the U.S. agency that seizes failed banks, is crafting guidance on the role private equity firms can play when investing in troubled institutions, FDIC Chairman Sheila Bair said.

Australian blood products group CSL Ltd said it would fight a U.S. regulator’s move to block its planned $3.1 billion takeover of U.S. rival Talecris Biotherapeutics Holdings Corp. Talecris is backed by Cerberus Capital Management. The comments were in response to the FTC’s statement that it will sue to block the deal.

Pine Brook Road Partners, Goldman Sachs, J.P. Morgan, PartnerRe, and Renaissance Re have invested $500 million in equity funding to mortgage insurer Essent US Holdings, a Radnor, Penn.-based subsidiary of Essent Group.

VC Deals

X1 Technologies, a Pasadena-based developer of enterprise search solutions, has raised an undisclosed amount of new funding from Idealab, its primary investor. Idealab’s CEO, Bill Gross, will re-join the company as Chairman.

Pixelligent Technologies, a nanotechnology application developer based in College Park, Md., closed on $2 million in new equity financing. The investors include local angel investors, a west coast tech entrepreneur and the company’s management team.

Dormir LLC, parent company of MD Sleep and CardioSom, has raised $8 million in capital from undisclosed investors with advisory services of Scale Finance.

New Day Pharmacy, a Nashville, Tenn.-based distributor of medication, has raised $10.2 million in Series A financing from Council Ventures. The company, which previously received backing from angel investors, filed for bankruptcy earlier this year.

Buyout Deals

Aquiline Capital Partners, the New York buyout firm which recently hired former Wachovia CEO Ken Thompson, said it now owns a 5.12% stake in BinckBank NV. The shares were acquired at no cost because of a transfer from parent firm JPMorgan Chase as part of a derivative agreement.

Alberta Investment Management Corp., which manages about C$80 billion ($72 billion) in assets, is on the lookout for investment opportunities similar to its recent purchase of a major stake in Precision Drilling Trust.

ZelnickMedia Corp has dropped its pursuit of the Austin American-Statesman. Cox Enterprises put the Austin paper up for sale last August, along with 28 other newspapers to raise cash to pay down debt.

Macquarie Group Ltd is buying Tristone Capital Global Inc., the Canadian energy investment bank, for C$116 million ($105 million) to expand in oil and gas advisory services, asset deals and equity research. Under the deal, Macquarie, which has been amassing businesses in Canada, will pay privately-held Tristone C$57 million in cash when the deal closes and C$59 million in exchangeable shares over five years, up to a total of four million shares.

Bain Capital, Charterhouse Capital Partners, Hellman & Friedman and Warburg Pincus are preparing binding bids for Wood Mackenzie, the energy consulting firm owned by beleaguered rival Candover, ahead of a June 2 deadline, Reuters confirmed.

Hilco Equity Partners and Monomoy Capital Partners acquired the Atkins Elegant Desserts, Inc. The business will work closely with Awrey Bakeries, LLC, a Livonia, Michigan bakery currently owned by Hilco Equity and Monomoy. Atkins, located in Noblesville, Indiana, is a niche manufacturer of cheesecakes, layer cakes and brownies.

Enel Rete Gas SpA, a natural gas distributor based in Italy, and a Enel Distribuzione SpA, will sell an 80% stake to F2i and AXA Private Equity for 480 million euros.

Terra Firma Capital Partners has invested an additional $45 million in EMI Group, its struggling entertainment company and largest ever investment, according to multiple reports. Terra Firma took a significant writedown on the company, which has $4.7 billion in debt, at the end of 2008.

Olympus Partners, a Stamford, Conn.-based private equity investor, has invested $50 million in equity and subordinated debt in Atlas Industrial Services LLC, which provides mill services to the global steel industry through its subsidiary Phoenix Services.

PE-Backed M&A

Intelligrated, a Cincinnati, Ohio, based logistics company backed by Gryphon Investors and Tudor Ventures, has merged with FKI Logistex Group Limited, a provider of automated material handling solutions.

PE Exits

Court Square Capital Partners has purchased Wyle Holdings, a military and government agency IT provider, from Greenwich, Conn.-based turnaround buyout firm Littlejohn & Co. for an undisclosed amount.

Firms & Funds

The Canada Pension Plan Investment Board to boost its real estate and infrastructure investments in fiscal 2010.

The private capital arm of the Ontario Teachers’ Pension Plan, one of Canada’s largest investors, will likely ramp-up purchases of businesses in the next three or four years as it takes advantage of bargains.

Apollo Management is preparing to raise a private equity real estate fund later this year and has hired professionals from Lehman Brothers, Goldman Sachs and Barclays Capital to lead the effort, according to Private Equity Real Estate. The group includes Scott Weiner and Ken Picache, Jason Eisenberg, Tim Fuzesi, and Joe Azrack, and Jon Thompson, the publication reported.

Human Resources

W.P. Carey & Co. has promoted Gino Sabatini to managing director. The investment firm promoted Kathleen Barthmaier and Darren Postel as Directors.

Robert Pacha has joined Evercore Partners to lead the firm’s midstream energy practice. Pacha was previously a Managing Director at Bank of America Merrill Lynch, where he led the firm’s midstream energy and MLP practice.

Robert Womsley joined Water Street Healthcare Parters, a buyout firm that invests in health care companies. Womsley, formerly a senior partner with Citi Private Equity, will begin July 1.