Castle Creek to raise new $500 mln fund - source

NEW YORK, May 21 (Reuters) - Castle Creek Capital, a private equity firm that invests in banks, is looking to raise a new $500 million fund, a person with direct knowledge of the company’s plans said on Wednesday.

The fund will be used to invest in community banks, for both recapitalization and consolidation, said the source, who declined to be identified because of the confidential nature of the plans.

The fund-raising process is expected to begin next month, the source said.

Castle Creek is one of the few private equity firms that make controlling investments in banks and other financial institutions, which puts it in a unique position as other buyout shops look to invest in the sector but are wary of regulatory restrictions that could come with it.

As bank stocks sink and leveraged buyouts deals dry up amid the global credit crunch, private equity firms are eyeing investments in the sector.

Last month, Washington Mutual Inc WM.N and National City Corp NCC.N each raised $7 billion, including minority investments from buyout firms.

Financial institutions globally have raised more than $250 billion of capital to offset massive credit losses and are likely to need more.

Castle Creek, which became a bank holding company in 1995, has said it has been approached by other buyout shops looking to invest in banks, as well as institutions looking to raise funds.

The firm primarily invests in U.S. banks with assets between $100 million to $5 billion. Since its formation, Castle Creek has led equity investments totaling of more that $1.9 billion in over 30 entities.

The firm has managed three private equity funds dedicated exclusively to the financial services industry. The new fund will be its fourth.

Editing by Richard Chang