Private Equity Industry Update

Private Equity Industry Video Update | THL Partners

Following yesteday’s look at the “new normal” of private equity, here is a good video update on the private equity industry from a partner at a major private equity firm. The economic recovery is still very shaky and private equity firms and investors are having to decide when is the right time to get back in the market again. Scott Sperling of Thomas H. Lee Partners, one of Boston’s largest private equity firms, says his firm is aggressively looking for new opportunities especially in the services and business outsourcing sector as well as retail but that this recovery is “fragile.” He also mentions the gap in valuation between what the company is valued at in the public market and what private equity firms think it is actually worth. E-mail subscribers can watch the video here.

Companies are still valued higher than private equity firms are willing to pay, and in order to pay 7-9 times cash flow Sperling says he must be certain that the economy is stable. Part of this may be a hope on the buyout side that these companies would be willing to sell for less than they are worth due to economic pressure. Sperling closes with the negotiations between the FDIC and private equity firms and the recent regulation, advocating strongly for lowering the reserve requirement so that private equity firms and their companies are not competitively disadvantaged.

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Tags: private equity investors, private equity update, news, trends, industry data, one year later private equity, 2009, 2008, economic crisis, private equity fdic, banks, fdic regulations, capital

FDIC Approves Bank Plan

FDIC Approves Rules for Private Equity Buying Banks

The Federal Deposit Insurance Corporation has eased its restrictions on private equity firms buying banks but even with this concession many private equity firms are not happy with the deal.

The FDIC voted 4-1 to approve a 10% capital requirement for banks owned by private equity firms. This is a step back from the strict 15% tier 1 leverage ratio that was originally proposed. However private equity firms must meet a much higher ratio than the 5% required of “well capitalized” banks and still higher than the 8% tier 1 leverage ratio required of new banks.

The FDIC is looking to private equity firms to rescue the some of the 81 banks it has shut down this year and others that have fallen in the recession and are expected to in the next few months. If buyers like private equity firms do not purchase these banks the FDIC will have to cover the failed banks with its $13 billion insurance fund.

Although some private equity firms have already moved to buy stakes in banks, many seem to have been waiting on the FDIC’s ruling to see if its a profitable investment. The new policy suggests avoiding the controversial capital ratio requirement by forming partnerships with current bank holding companies to bid for failed banks. Another contentious issue is the requirement that private equity buyers hold onto the banks for at least three years. This demand was kept and Chair Sheila Bair explained “We do want people who are interested in running banks.” A chief concern according to the FDIC is that private equity firms with little to no experience in the banking industry will put the banks and taxpayers at risk.

The Private Equity Council is an advocacy group for several of the largest private equity firms and it has been a key negotiator with the FDIC. Douglas Lowenstein, President of the Private Equity Council, has already voiced its dissatisfaction with the ruling in a statement issued today:

“The revised FDIC guidelines represent an improvement over those originally proposed in July. But we continue to question the need to impose more onerous capital requirements on private equity firms that invest on behalf of retired police officers, firefighters, teachers, and other public employees.

“At a time when the nation’s banks are struggling to raise capital, it is counterproductive to impose measures that could deter investors who are ready, willing and able to provide that capital. Higher capital thresholds could make it less likely that private equity investors will bid on failed banks. At a minimum, it will reduce the value of any bids, increasing the resolution costs for the FDIC and creating greater likelihood that the agency will be forced to tap the $500 billion line of credit put up by American taxpayers. Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise.

“That said, we appreciate the fact that the FDIC will review this guidance in six months. We hope that this review will yield a long-term policy that will equally benefit the customers and communities of failed banks, the FDIC, private investors, and the United States’ taxpayers.”

The Private Equity Council represents: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital.

This is an important issue for private equity and the banking industry so I have been covering this in some detail. Here are some of the articles and resources on the FDIC’s regulation of private equity firms investing in banks:

• FDIC Proposes Strict Guidelines for Private Equity
• Tom Brown on Private Equity Banking
• Wilbur Ross Criticizing the FDIC Plan
• All Stick No Carrot for Private Equity in Banks
• Private Equity Banks

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Tags: private equity fdic, fdic troubled banks, banks in trouble list, fdic buyout, private equity rules, regulations, federal deposit insurance corporation, private equity investing in banks

Private Equity Banking

Tom Brown on Private Equity Firms Buying Banks

Thomas K. Brown is a well-known figure in the banking industry who operates Bank Stocks.com and manages a hedge fund investing exclusively in financial services. He has a tough criticism of FDIC Chairman Sheila Bair and her position on private equity firms investing in banks. In an Op-ed on Seeking Alpha Brown asks: “What is it with Sheila Bair and private equity investors? Did she have a bad date with one in college? Somebody seems to have plunked the idea into her head that private equity investors are somehow dumber, or less competent, or less ethical than other bank investors.” Here is a video of Thomas Brown talking about his piece and explaining his frustration with Bair, e-mail subscribers can watch the video here.

As I have covered in this blog, the FDIC and private equity firms have battled over the banking crisis. Originally the FDIC was requiring private equity firms to keep a Tier 1 capital ratio of 15% which is about twice that required of other institutions. Bair also suggested that private equity funds for at least 3 years (not an unreasonable condition, considering the typically long-term commitment by PE funds.) She also proposed that banks held by a single private equity firm must cross-guarantee each others’ liabilities. Brown is at a loss for why the Chair of the FDIC is stalling this process:

…why has the Dragon Lady of the FDIC, Sheila Bair, thrown up one roadblock after another to prevent private equity investors from supplying the capital to the banking industry that the government itself insists the industry so urgently needs?

Sheila Bair has backed off some by reducing the capital ratio to 10%, but that is still a stricter requirement than other institutions putting private equity firms at a disadvantage to other buyers. Brown wonders, “What is it with Sheila Bair and private equity investors? Did she have a bad date with one in college? Somebody seems to have plunked the idea into her head that private equity investors are somehow dumber, or less competent, or less ethical than other bank investors.” He continues his criticism saying her tenure has been characterized by repeated poor decisions and he looks forward to her departure from the FDIC.

I find it a bit curious that Thomas Brown has used such strong language and been so critical of Bair and many other voices in private equity have been silent publicly. One reason is probably because Brown does not have a vested interest in the FDIC rules on private equity whereas private equity firms are trying to work out a favorable deal and public attacks like this will not help their situation.

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Tags: Private equity banks, private equity banking, private equity regulation, private equity rules, private equity FDIC, private equity banks investing, private equity investing in banks

Buyout FDIC

Can the FDIC Attract Buyout Firms for Failing Banks?

Those in the financial industry are wondering if the FDIC can draw up a new proposal for private equity firms investing in failing banks that will satisfy all parties. Wilbur Ross issues a harsh condemnation of the FDIC’s proposed guidelines for aiding the failing banks. He highlights the Tier 1 leverage ratio which of the bank’s capital to assets as being far too high a demand (15% compared to the 5% required for well-capitalized banks.) He believes that a 7.5%-8% rate would be more enticing to private equity buyers. The rumor is that the FDIC is leaning toward 10%, a big improvement from what was previously proposed but it still may not be enough for buyout firms.

The following video can be seen here for newsletter subscribers.

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Tags: Private equity FDIC, FDIC buyout, FDIC private equity firms, Federal Deposit Insurance Corporation, FDIC buyout firms, FDIC Banks and Buyouts, Buyout banks, private equity banks

FDIC Private Equity

FDIC Proposes Strict Guidelines for Private Equity

The Federal Deposit Insurance Corp proposed tough guidelines for private equity firms to buy failed banks. The FDIC announced Thursday a plan that calls for private equity groups to meet strong capital requirements and commit to long-term investments, in order to purchase the collapsed banks.

The proposal requires private equity groups to consistently maintain strong capital in the banks, “specifically a Tier 1 leverage ratio of 15 percent, for three years. They would also generally have to maintain the investment in a bank for three years.” Additionally, private equity groups must provide a “contractual cross guarantee,” in which a firm that owns two banks allows the healthier institution to provide aid for the weaker. Private equity groups would also be discouraged from lending credit to their own investment funds, affiliates or portfolio companies. Furhermore, private equity groups owning banks would need to major disclosures about their ownership structure, giving regulators greater insight as to who is running the investment.

Bank regulators on the FDIC’s board argued openly over the guidelines with some officials saying that such tough measures will only scare off private equity investors, a much-needed source of capital for troubled banks. While alternative investors may be the saving grace for the banks, as traditional sources of capital have failed to rescue them. But bank regulators are nervous that allowing private equity groups to buy banks may be less secure than with traditional investors that are subject to strict regulation by the SEC.

Yet other regulators, like Comptroller of the Currency John Dugan feel that opening up to private equity investors will help the banks. He says, “I do fear that the current articulation of the proposal has standards that go too far. There is real money and real capital that can provide savings to the deposit insurance fund.” On the other side of the fence are those who defend the strict guidelines, like FDIC Chairman Sheila Bair. She argued that the requirements are necessary for ensuring the stability of the banks but admitted, “I’m not sure we have it right here, but we do have a solid document.”

Private equity firms have already started to move into the banking sector. Carlyle Group, Blackstone Group (BX.N), WL Ross & Co. and Centerbridge Partners decided to invest $900 million toward rescuing Florida’s BankUnited.

Quotes from Reuters

Tags: Private equity banks, private equity FDIC, private equity investing in banks, alternative investments in banks, banking regulation, FDIC Regulation private equity, buyout FDIC banks