Bank Holding Co. Structure Enables PE Investment in Financial Sector

Last month, federal regulators loosened restrictions on private equity investment in financial services companies. The move has not, however, sparked a rush of PE activity in the sector.

Part of the hesitance has been shellshock from the troubles of J.C. Flowers and TPG Capital. A larger part has been that the new regs still prevent private equity firms from taking a larger than 30% stake in a bank. It’s really a fatal dagger, because minority shareholders, with minimal board representation, can’t replace management or make changes as quickly as necessary.

But three private equity firms out there can take control of banks and thrifts, making them uniquely positioned to capitalize on the troubled sector. Belvedere Capital, CapGen Financial and Castle Creek Capital are the only private equity firms structured as bank holding companies.

The bank holding company setup is not an attractive structure for most PE firms, since bank holding companies can only invest in financial services companies, and are highly regulated by the Fed. But financials is all Belvedere, CapGen and Castle Creek do — a specialty that makes them particularly attractive partners for larger PE firms in search of depressed valuations.

“We’ve been bombarded with approaches and opportunities,” said a source close to one of the firms. “We’ve seen an uptick for sure.” PE firms know they won’t be granted the right to make control stake buys, so partnering with the likes of Belvedere, CapGen and Castle Creek, might be the best way to get a piece of the action.

“It’s unfortunate that TPG and Flowers got in too early, but the rest of us are salivating,” another source said.

And they’re making sure they have enough dry powder. Belvedere and Castle Creek are both in fund-raising mode. Castle Creek launched efforts to raise $500 million in June. Belvedere is also raising a new fund of the same size, the firm’s third, a source familiar with the situation said.