Insiders are divided as to how much of an impact the Federal Reserve’s more relaxed guidelines for private investments in US banks will have on private equity firms.
The new guidelines allow investors to buy up to a 33 percent non-voting equity interest in banks without being considered a controlling shareholder, so long as the investor does not own more than 15 percent of any class of voting stock. Otherwise, the old threshold of 25 percent non-voting interest will apply.
Private equity firms have traditionally sought to avoid tripping these thresholds since it would require them to become bank holding companies subject to capital requirements, minimum leverage ratios and other regulations. Some firms, like San-Francisco-based Belvedere or New York-based CapGen Financial, have registered as such in hopes of achieving a greater control over portfolio companies.
But now investors can gain greater control, by obtaining up to two board seats instead of one and having the ability to meet with banks' managmenet teams, without becoming bank holding companies.
I don't see it as a great panacea that will open the floodgates to private equity investing in banking.
“The [Fed's] changes make the investment more attractive because you get better bang for your buck and you can protect your investment better than before,” said Joseph Vitale, a partner in the bank regulation practice of law firm Schulte Roth & Zabel in New York.
But others see limits as to how much of an impact these changes will have.
You get more bank for your buck and you can protect your investment better than before.
“I don’t see it as a great panacea that will open the floodgates to private equity investing in banking,” said Decker, who founded Belvedere Capital in 1994 and worked with former Federal Reserve chairman Alan Greenspan’s general counsel to open the banking industry to private equity.
Decker, who sits on the boards of several small- and mid-cap banks, said that while the rules may encourage some new investment, traditionally structured private equity firms will find investing in smaller banks requires a greater degree of control than even the more relaxed Fed guidelines allow.
Peter Majar, managing director at financial services-focused investment bank Freeman & Company, agrees. “On the smaller, regional level, funds like CapGen will still have an advantage because they will be able to take controlling interests beyond that 33 percent,” he said.
But Majar notes when it comes to investing in larger institutions, the new rules give private equity firms “a more level playing field”. Up until now, large, diversified private equity investors like The Carlyle Group or TPG would have had to register as bank holding companies in order to gain more control or a larger stake.
For TPG, which in April led a $7 billion investment into Washington Mutual in exchange for only one board seat and one board observer, Major said the Fed's new rule could have made a tangible difference as TPG would likely have been given two board seats – or twice as much control for the same price.
Like Decker, Majar is cautiously optimistic the rules change will cause private equity firms to do more banking sector deals.
“It is certainly a positive development,” Majar said. “Looking at the next 12 months, it would encourage us to think that it [private equity investment] will be more robust than we would have expected a month ago.”
Likewise, Washington DC-based Private Equity Council hailed the Fed's decision as “a positive step”, arguing that “it will encoure new and much-needed investment in our nation's banking system” and “help protect taxpayers” by reducing the prospect of further bank failures.