Pacific Investment Management Co. is raising billions of dollars for a fund that will behave similar to those managed by WL Ross & Co., the private investment firm that, since the recession’s onset, has been buying into community banks with expectations that the industry will consolidate. Like WL Ross & Co., Pimco is not going to buy even as much as a quarter of a bank. Twenty-four-point-nine percent will be the maximum.
As regulators look to hasten the transition between owners of assets to ensure the assets do not further deteriorate in value and ensure banks’ capital reserves are sufficiently improved, private investors do not typically buy enough of a bank to become a bank holding company. Instead they opt to team with other investors to acquire minority stakes as a group.
A source familiar with Pimco’s strategy said the investor will not take a percentage in any asset greater than 24.9% to defend it from what he said would be substantially greater regulatory compliance demands. It will make equity investments, as well as buy banks loan and security portfolios, a source said, but the fund, Pimco Bravo, will not act as a bank holding company.
“There is a regulatory level of scrutiny that increases” when a private investor assumes a stake in a bank of 25% or greater, the source said. “Being a bank holding company is no fun.”
But buying into banks is. Thomas H. Lee Partners, Warburg Pincus and Ford Financial Fund have also bought in and investors have quickened their pace of making investments, taking stakes from the U.S. Treasury instead of waiting for an asset to fail and be absorbed into the Federal Deposit Insurance Corp. As many banks limp forward carrying bundles of bad debt, using the Treasury’s TARP investments as a crutch, the department is eager to realize some—any—return on its investment. Seeing the potential for the industry’s consolidation (there are plenty of assets across the country that can be merged, and automated processes will reduce costs), private investors have already deployed billions.
The Pimco fund will not be guided by any geographic targets, the source said, adding it will pursue management teams with a regional track record and that it will invest in “legitimate consolidators.” WL Ross & Co. founder Wilbur Ross, by comparison, said in a New York Times interview that he expects bank industry consolidation to take place in New Jersey, where he has already invested.
Percentage-minded deals for WL Ross & Co. include 24.9% buys into the likes of First Michigan and SunBancorp. The investor also teamed with North Fork Bancorp Chairman and CEO John Kanas, Blackstone Group, Carlyle Group and Centerbridge Partners to spend $900 million to acquire BankUnited Financial of Coral Gables. No investor took a stake greater than 24.9 percent.
The name of the Pimco Bravo fund, which was first reported last week by Bloomberg, is based on an abbreviation for Bank Recapitalization and Value Opportunities. The story quoted an investor who said the Pimco fund could raise up to $3 billion. However, another source that spoke with peHUB said that a target has not formally been established and that “it may turn to be even bigger” than early projections.