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* Public markets willing to recapitalize bigger banks
* Some PE firms focus on combining several small banks
* FDIC auctions are often too competitive for PE to win
By Paritosh Bansal and Dan Wilchins
NEW YORK, June 23 When Synovus Financial Corp
(SNV.N) raised about $1 billion from public markets in April,
private equity firms circling the Georgia bank were reminded
that they have to think small to play in the U.S. banking
Struggling banks were supposed to be a bonanza for private
equity firms. But buyout shops have found themselves forced to
turn to smaller banks for investment opportunities, as many of
the biggest lenders can now raise capital from the public
markets instead, or sell out to stronger competitors.
"There really aren't a lot of very big banks out there that
are likely to need significant capital that cannot access the
public markets," said Brian Sterling, co-head of the investment
banking group at Sandler O'Neill. "Good community banks in good
communities sell for better values. The view is, 'We'll buy
them, we'll clean them up and we'll get value afterwards.'"
Often, private equity firms are looking at deals that are
so small that they would seem to be a waste of time. But tiny
deals can make sense: they can help firms build a track record
and get comfortable with regulators as well as with the process
of investing in the highly regulated sector.
Firms can use smaller banks as a platform to acquiring more
banks, private equity investors said.
And smaller deals are much easier to vet carefully, said
Don Marron, CEO of Lightyear Capital, a private equity firm
focusing in part on financial firms. A smaller bank's portfolio
can be reviewed in a few months, while looking at a $30 billion
portfolio would take much longer, he said.
"It's very risky to do a big deal -- you don't want to take
a lot of risk on the asset side," Marron said.
Last week, Aquiline Capital Partners, a private equity firm
run by former Marsh & McLennan Cos Inc (MMC.N) Chief Executive
Officer Jeffrey Greenberg, anchored a $35 million capital raise
by BNC Bancorp (BNCN.O), a commercial bank with $2.2 billion in
Even giant Carlyle Group [CYL.UL], which manages more than
$90.5 billion, is setting its sights on small targets. Carlyle
finished raising a $1.1 billion fund in April for financial
services and said it would focus on mid-market and regional
financial institutions that need additional capital.
Last month it teamed with Anchorage Advisors to invest $73
million apiece in Hampton Roads Bankshares Inc HMPR.O, a bank
with sixty branches in Virginia, North Carolina, and Maryland.
Hampton Roads has about $2.2 billion of assets.
Private equity firms are mainly focusing on banks that are
troubled, but have not yet been closed by the Federal Deposit
Insurance Corp. FDIC auctions are typically too competitive
because so many banks are looking to buy failed rivals, private
equity investors said.
A FAR CRY FROM 2008
Recent private equity transactions are a far cry from
Washington Mutual's deal to raise $7 billion from a group of
private equity firms in 2008. TPG Capital led that deal,
putting in about $1.35 billion of its own money and ultimately
losing nearly $500 million.
These deals are also more humble than the private equity
takeovers of failed IndyMac and BankUnited in 2009.
Some deals happening now are on the larger end of the
community bank spectrum, but are still relatively small.
Sterling Financial Corp STSA.O is looking to raise $278
million from Warburg Pincus and Thomas H. Lee Partners, and
Pacific Capital Bancorp is looking to raise $500 million from
Ford Financial Fund.
Both banks have more than $7 billion in assets. Both deals
are contingent on the banks successfully clearing other
hurdles. Pacific Capital for example, must buy back debt at a
big discount to face value, while Sterling needs to raise more
These hurdles could be tough to clear, and the industry is
closely watching them.
There is no shortage of troubled community banks in the
United States. Since the beginning of 2009, 223 banks have
failed, and more are on the way.
There were 775 banks on the FDIC's troubled bank list as of
the end of the first quarter, although many of those will not
fail. Most of these banks are expected to be smaller, community
banks, which could be ideal targets for other small banks that
have been capitalized and fixed by private equity firms.
"There is an invest-and-build strategy as opposed to making
one large investment in a marquee level franchise," said James
Murray, a financial institutions investment banker at Houlihan
Lokey. "It's being driven by what's available and what's
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(Editing by Gerald E. McCormick)