The recent rash of PE-backed bank buyouts has prompted scores of questions, but I haven’t yet heard anyone ask about strategy drift. Are investors okay with their buyout fund managers delving into the world of distressed bank assets?
Or, let’s look at it this way: Are general partners stepping outside of their bounds to do these deals? Ever since the prospect of private equity investing in banks arose, we’ve heard of the extreme difficulties posed by such an endeavor. Aside from the burns on deals like WaMu and several J.C. Flowers investments, it’s been said that private equity firms don’t understand the extensive federal regulation that comes with owning a bank. Aside from that, investors have expressed worries that the government is an unreliable partner, and that the numerous regulatory bodies overseeing banks have no standard policy for private equity investments.
Yet there have been two bank deals with traditional buyout firms in as many weeks: Two weeks ago, The Blackstone Group, The Carlyle Group, WL Ross and Centerbridge Partners bought BankUnited. Yesterday, the Wall Street Journal reported that the Carlyle Group and three unnamed PE partners will purchase Silverton Bank.
Although I haven’t read either way, I assume that Carlyle is using its newly raised financial services fund, led by Olivier Sarkozy, to do these deals, which would make it a perfect fit.
On Centerbridge’s end, the firm offers no information as to its strategy on its website. We know it invested in Dana, the bankrupt auto supplier. We know it failed to purchase Penn National Gaming and considered purchasing Chrysler and is probably better off for not achieving either.
As for Blackstone Group, the firm owns or has owned financial services companies like Bayview Financial (a Florida mortgage company), Alliant Insurance Services, Ariel, FGIC, Aspen, Axis, Corp Group and LaSalle Re. Except the only one that appears to be a bank is South American Corp Group, a realized $750 million deal from 1997.
And as for WL Ross & Co., firm patriarch Wilbur Ross has been very vocal about his firm’s interest in the space. That doesn’t make him any more qualified, but perhaps his experience does. From a recent interview with Buyouts magazine:
Buyouts: You bought a small bank earlier this year and you’ve expressed interest in buying more banks. How is this banking crises different from other industry crises you’ve worked in?
WR: In the Japanese banking crisis, we bought a failed bank from the Japanese government, Kofuku, in Osaka. We renamed it Kansai Sawayaka-Kansai is the region, Sawayaka means rebirth. We put a whole new management team in. We got it to where it was earning 17 percent on equity in a year, and we eventually merged it with the Kansai affiliate of Sumitomo Matsui bank. To this day, it’s one of the more successful banks in Japan. In the United States, the problems are very similar. The Japanese banks failed because of bad real estate loans. That’s more or less what’s happening here. And we’re putting a big emphasis on operations in Florida. We think that there’s room to create a quite large institution focused there because it has a very good deposit base thanks to retired people. So while there’s a tremendous glut of excess residential capacity in Florida, over time it will correct itself and it will be a vibrant place.
Buyouts: How many would you like to buy?
WR: Well, most all of the banks in Florida have troubles, and most all of them will either fail or at least need capital, so there’s not going to be any lack of supply.
So are these deals strategy drift? Based on the information available, I’m not so sure. I’d be curious to hear if this is what LPs believed they signed on for, if its a pleasant surprise, or if they’re flabbergasted their GPs would be so bold. I’m especially curious, because from the looks of it, there are going to be a lot more deals like this in the very near future.