Ares CEO Michael Arougheti predicts more bank deals; Warburg Pincus details recent bank merger

Good morning, Hubsters. MK Flynn here with the Wire.

Since Silicon Valley Bank failed back in March, we’ve been asking our sources what the demise revealed about the vulnerabilities of regional banks – and what the opportunities for private equity firms might be in the sector.

Lately, we’ve been getting some solid answers.

Earlier in July, Warburg Pincus and Centerbridge Partners teamed up on a California bank merger.

Today, we’re featuring an interview with Warburg about the deal.

We’ve also got some comments made by Ares Management’s Michael Arougheti, who predicts more bank consolidation is coming.

Bank merger
As some banks are dropping out of the California market, Warburg Pincus is “closing the vacuum” and pursuing a number of opportunities alongside its co-investor Centerbridge Partners through the merger of Banc of California and PacWest Bancorp, Todd Schell, principal at Warburg, told PE Hub’s Obey Martin Manayiti.

The pair of New York-based private equity firms unveiled in July a $400 million investment in a merger that will see new operations under the Banc of California name and branding at the close of the transaction, which is expected in late 2023 or early 2024.

The combined company is expected to have approximately $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches in California.
“Southern California is an attractive banking market but has historically been very competitive,” said Schell who will be joining the board. “Over the last six-to-12 months, competition has either left or become distracted, so there is a bit of a power vacuum there.”

Some regional banks are reeling under the pressure of the tight macroeconomic environment, coupled with high interest rates.

Silicon Valley Bank, First Republic and Signature Bank are some of the banks that have faced challenges. Others, such as Union Bank or Bank of the West, were bought by international competitors.

For the joint business, Schell added that there is an opportunity to build niches. “We like banks that operate in niches,” he said. “Niches require differentiated underwriting knowhow and a unique distribution strategy but can yield highly attractive risk-adjusted returns if done right.”

In developing niches, there is room for the investment to grow a network and reputation as a primary provider of financing in the businesses that they support. This will also be an opportunity to develop expertise that is useful in decision making, especially in choosing businesses to work with.

PacWest has expertise in several niches, such as HOA, portfolio lending, equipment lending and leasing, while Banc of California’s niche strengths involve healthcare, education, entertainment and warehouse lending.

Warburg is a strong believer in deposit franchises and stable funding, Schell said, adding that, in this investment, they are seeking to create an “excellent deposit franchise.”
The merger also seeks to benefit from efficiency of operations. “We look for management teams who prioritize profitable growth and align interests across their organizations.”

With a combined balance sheet, the bank is going to have strong capital liquidity position and ready to “play offense,” Schell said. “Having the firepower of a larger balance sheet gives Banc of California the ability to expand and deepen its customer relationships, while still being careful around having a diversified business.”

More bank deals coming
Ares Management’s senior executives anticipate more consolidation in the troubled US regional banking sector, which will create investment opportunities for the Los Angeles-based firm’s private markets business, including real estate and alternative credit, reports PERE’s Aisha Kapoor.

The banking sector challenges could continue to play out for the next year or two, Ares co-founder, chief executive officer and president Michael Arougheti said during the firm’s second-quarter earnings call.

“I think we’re still in the early stages of the transition in the banking market. My expectation is we’ll continue to see more consolidation. With that consolidation, I think we’ll see secondary asset purchase opportunities and reduced competition in the primary market,” he said.

Bank retrenchment from the commercial real estate lending market will in turn drive institutional investor demand for debt, Arougheti said.

“We continue to see strong institutional demand for real estate debt due to the general risk-off sentiment in the banking sector and the outsized return opportunities to inject capital at conservative levels with reset valuations,” he said.

Although transaction activity remains slow, “we’re finding interesting opportunities, particularly in real estate debt and across the platform in sectors where we have differentiated sourcing and operating capabilities,” Arougheti said. In the second quarter, the firm’s real estate deployment included $600 million in European real estate equity, and $400 million in US real estate equity.

News in brief
Before I sign off, I want to take the opportunity to showcase our steady stream of deal coverage.

For quick takes on deals throughout the day, check out the “News in brief” sections on the right-hand side of our home pages. There, you’ll find deal briefs written by Iris Dorbian and Irien Joseph.

For coverage of PE-backed transactions involving US-based targets, go to PE Hub.

And for transactions involving European targets, go to PE Hub Europe.

That’s all for now. Obey will be back with Friday’s Wire, and I’ll see you on Monday.

Happy dealmaking,

MK