Banc Funds targets $650 mln with Fund X

Banc Funds Co is back on the market with a new vehicle targeting $650 million for investments in U.S. banks, a Minnesota State Board of Investment memo shows.

The fund has an $800 million hard cap.

Banc Funds, led by Charles Moore, specializes in acquiring minority stakes in small banks and thrifts. Its 10th fund is expected to make non-control investments between $1 million and $10 million, though certain banks may warrant investments of up to $25 million, the memo says.

Investments in banks and other financial institutions are often cyclical. While most Banc Funds vehicles have generated internal rates of return in the 15 percent to 21 percent range, companies held through its pre-crisis vintages were battered by economic volatility.

“The last seven years have been about as humbling as can be,” Moore told Buyouts in a 2016 interview. “We were in a very hard-hit industry. We were saved by a lot of the things we’d done for a long time — but not saved entirely.”

Banc Fund VI, a $320 million 2002 vintage, and Banc Fund VII, a $450 million 2005 fund, were netting IRRs of less than 5 percent as of Sept. 30, according to Minnesota documents.

The firm’s performance improved with more recent vintages. Minnesota’s commitment to Banc Funds’ $536 million 2014 fund is marked as netting a 20.9 percent IRR and 1.3x multiple as of the same date.

Banks are holding higher levels of capital than they were in the years leading up to the global financial crisis, the Minnesota memo shows. That, along with improved prospects for growth and attractive valuations, makes Banc Funds’ unique sector-specific strategy an interesting fit for the state’s private equity portfolio.

Minnesota is an LP in six of the firm’s previous funds, having committed $343 million since the firm’s inception in 1986. The pension committed up to $150 million to Fund X.

Furthermore, the financial-services industry is starting to benefit from tailwinds after a dormant period following the recession, according to a source with knowledge of the funds.

Banc Funds portfolio companies stand to benefit from higher interest rates and deregulatory efforts pushed by President Donald Trump’s administration.

Lower taxes will help as well, the source said. The reduction of the corporate tax rate to 21 percent from 35 percent  could substantially reduce the tax burden of many of the firm’s portfolio companies.

“As we move further from the events of 2007-2011, I think we will find opportunity that we’ll be able to capitalize on, and it’s our hope we get back to a world of fewer dislocations,” Moore told Buyouts after closing Fund IX.   

In 2017, the firm settled with the SEC over allegations it violated pay-to-play rules. The firm paid a $75,000 penalty without admitting or denying any wrongdoing.

Action Item: For more on Minnesota State Board of Investment, visit http://mn.gov/sbi/

Photo of Charles Moore courtesy of Banc Funds.