Buyout shops that acquire more than 25% of a bank are deemed a bank holding company and subject to federal regulations and reporting requirements. Apollo, however, plans to exploit an obscure provision in the new federal reform bill that would let it bypass such conditions. Specifically, it will ask investors to put money alongside it in the new bank, called Aris. The bank also will have a separate board and operate independently.
Apollo’s plans are “easier said than done,” one buyout executive tell me. Federal regulators will focus on Apollo’s control of Aris and the LPs’ relationship to the private equity firm, which may make it difficult for such a scheme to gain approval.
Control is a big issue for bank regulators. Consider Green Bancorp, which spent a year-and-a-half negotiating with regulators to complete a $100 million investment from three private equity firms.
To ensure that Houston-based Green Bancorp was not controlled by the buyout shops, each firm’s stake was kept to less than 25 percent. The buyout shops also didn’t know each other before the deal and each could only have one seat on the bank’s board and no more. And this was for an existing bank.
Regulators also are no fans of silo structures: “If [regulators] feel they want an investor responsible for ongoing capital commitments under a source of strength, they will not allow this structure,” one buyout exec says.
Some PE sources also questioned whether Apollo would consider Aris to be a portfolio investment. “I assume if they are bringing in LPs it will just be portfolio company deal and they will pursue a consolidation play,” one source said.
PE shops wanting to start their own banks is not new. In 2008, when banks starting blowing up, there were numerous buyout shops with plots to start their own. Very few have materialized (J.C. Flowers and MatlinPatterson both did using the silo method but the FDIC has said it won’t allow such structures anymore). But there are more than 700 banks on the FDIC’s troubled bank list so regulators may be more open to this sort of scheme. “Regulators must balance the need for more capital in the banking system with the issue of safety and soundness in the industry,” another buyout source says.
An Apollo spokesman declined comment.