PE Firms On The Hunt For Banks, Again: UPDATE

PE firms are on the hunt for banks again, several sources say.

Interest is so great that i-bank Sandler O’Neill & Partners is handling mandates from at least 15 banks that are looking to recapitalize. And the primary source of new funds? Buyout shops.

“All the small banks in the world are trying to find new capital,” says one banker. “PE is the only real money for any deal,” adds a buyout executive.

Independent Bank Corp., parent of Independent Bank, and AnchorBancorp Wisconsin, which owns AnchorBank, are each in talks with PE firms for funding, sources say.

In September, Chris Bauer, CEO of both AnchorBancorp and AnchorBank, said that the bank is in “active discussions with potential investors.” Sandler O’Neill is their adviser.

Similarly, Independent Bank announced last month that it had agreed to sell up to $15 million in stock to Dutchess Capital Management, an investment manager, over the next 36 months as a source of liquidity. Independent Bank is still looking for investors, sources say.

PE firms have experienced a change in sentiment. In 2008, buyout shops were expected to be major acquirers of banks. That changed after TPG lost $1.35 billion on its investment in Washington Mutual (which was acquired by JP Morgan Chase). Federal regulators also became very leery of PE firms owning banks, which put the stops on deals.

But sponsors are feeling more confident. “People have some view of the bottom here and it’s bringing out interested parties,” a buyout executive says.

Banks are also flooding the market with deals. There are currently 829 banks on the FDIC’s problem bank list, a spokesman says.

Private equity investments have increased (most of the PE deals are for stakes in banks and not acquisitions, one source says). There were 16 PE-backed U.S. bank deals by the end of September, raising about $3.3 billion. This compares to the dozen deals in all of 2009, valued at $2.3 billion, according to data from Thomson Reuters. Some of the larger transactions this year include the $500 million investment from Ford Financial Fund, the PE firm of Gerald J. Ford, into Pacific Capital Corp. Sterling Financial also completed a $730 million recap in August, which includes investments from Warburg Pincus and THL Partners.

So who’s looking for capital? Smaller banks, those with $5 billion assets or less, that are not publicly traded and may have some losses with their portfolios, are actively searching for new sources of capital, one banking source says.

Charlie Crowley, a managing director at Paragon Capital Group, says that PE discussions with banks have reignited. However, there is still a mismatch between what sellers are looking for in deals and buyer’s price expectations.

Buyers, Crowley says, aren’t focused on P/E ratios as much as they are on forward earnings. Companies with a high level of non-performing assets will sell at a discount to book while a bank with their “situation under control” will get a little more than book, he says. “And a really quality company in a good market will get more,” Crowley says. “But it’s nothing like the good old days of a few years ago.”

UPDATE: Rob Shuster, Independent’s CFO, says that the bank has filed with the SEC to sell from$110 million to $126 million via a stock offering. The filing is not effective yet, he says. “We are talking to potential firms that could participate in that offering,” Shuster says.

Officials for Anchor and Sandler O’Neill couldn’t be reached for comment.