Castle Creek raises $331m for distressed bank deals

Castle Creek, one of the first firms to register as a bank holding company in the mid-90s, has closed Fund IV with commitments from LPs including Morgan Stanley AIP.

US community bank-focused Castle Creek Partners has raised $331 million for its fourth private equity fund. The fund, which had been targeting $500 million according to 2008 media reports, will source recapitalisations, growth equity and buyout opportunities, focusing on turnaround and distressed bank investments.

Placed by Thomas Capital Group, the fund attracted commitments from limited partners including Morgan Stanley Alternative Investment Partners. “Castle Creek's operationally-focused and deeply experienced team, combined with the fund's focus on small- to middle-markets where we believe the potential for value creation is greatest, makes for a particularly compelling investment opportunity for AIP,” Jeff Collins, an AIP portfolio manager, said in a statement.

Castle Creek managing partner John Eggemeyer said in the statement that now was the “most opportune” time in the past 20 years to invest in community banks.

We believe the severe recessionary downturn over the last three years has caused significant distress in the banking arena.

 John Eggemeyer

“We formed our fourth fund because we believe the severe recessionary downturn over the last three years has caused significant distress in the banking arena, and the valuations of select community banks will benefit greatly from a combination of additional capital support, the ongoing economic recovery, and a building wave of M&A activity,” he said.

The fund has already completed seven investments across six different metro areas, according to a statement.

Castle Creek was among the first private equity funds to change its status to a bank holding company when the Federal Reserve changed the rules to allow private equity firms to do so in the mid-1990s. That status allows them to take controlling interests in banks, but also places stringent restrictions on such entities, including regulatory capital requirements, minimum leverage ratios and limitations on the kinds of non-banking activities in which they and their subsidiaries may engage. This has traditionally made it difficult for large, diversified private equity firms to take controlling stakes in banks without having to subject themselves to the provisions of the act.

In 2008, the Fed loosened its rules on bank investment by private equity funds, allowing investors to buy up to a 33 percent nonvoting equity interest in US banks without being considered a controlling shareholder. Though that limit previously stood at 25 percent equity interest, the Fed has broad discretion in determining what counts as a controlling stake, and in the past, even a 10 percent stake could be considered enough to trigger the designation. The new threshold applies as long as the investor does not own more than 15 percent of any class of voting stock. Otherwise, the 25 percent threshold applies.

California-headquartered Castle Creek has made more than 60 bank investments since 1992.