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DEALTALK-Private equity firms focus on small U.S. banks
June 23, 2010 / 5:56 PM / 7 years ago

DEALTALK-Private equity firms focus on small U.S. banks

(For more Reuters DEALTALKS, click [DEALTALK/])

* 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 (Reuters) - 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 sector.

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 assets.

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. [ID:nN06224261]

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 capital.

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 feasible." (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Editing by Gerald E. McCormick)

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