It’s good to see private equity firms and their limited partners on the same side at a time when many are fiercely renegotiating terms and conditions.
Since the US Federal Deposit Insurance Corporation proposed bank ownership rules in early July, both GPs and their LPs have been loudly protesting the potential regulations and their ramifications.
The FDIC, which will vote on its proposed rules Wednesday, wants investment firms to keep a higher capital cushion in the banks they own and, among other measures, would also like to impose a three-year hold period on private equity firms that invest in banks.
More than 60 public letters protesting the potential rules have been sent to the FDIC from some big hitters in private equity like The Blackstone Group, JC Flowers, Lee Equity Partners, Golden Gate Capital, Kohlberg Kravis Roberts and CharlesBank Capital Partners. And Blackstone's Tony James as well as Fortress' Wes Edens have used recent earnings calls as platforms to express concern over the FDIC proposals.
But it's not just the GPs that are up in arms. A group of influential public US pensions also wrote the FDIC with its own list of concerns over the regulations, backing up the comments from GPs and at the same time showing that institutional investors are knowledgeable about the issues that may effect the opportunities in an important asset class.
For example, as the pensions point out, the 15 percent capital cushion the FDIC would like to require for private equity firms is “unduly restrictive and will limit the ability of these banks and thrifts to be recapitalised”. This is probably the most hotly contested proposed rule from the FDIC, but other rules, including forcing investment firms to serve as a “source of strength” to their banks, have also been questioned.
The pensions also raised concerns about an expansion of the source of strength requirement that would put a claim on underlying investors in a club deal for a bank. Under that scenario, minority investors in a club deal could be required to provide support for ailing banks, even if they are not the controlling institution. This situation could lead to “open-ended capital calls” that would drive away investors from participating with any firm subject to that requirement, the pensions argued.
It's good for the industry that both managers and their investors have rallied to fight regulations that would prevent them from making potentitally lucrative investments. The FDIC would do well to take these suggestions to heart and find a way to bring all parties on board for the benefit of the US financial system.