Private Equity’s Cautious Comeback Into Bank Buyouts

(Reuters) – After a disastrous foray into banking early last year, private equity is making a cautious comeback with deals such as the BankUnited takeover, and their return will likely change how the industry looks.

Regulators appear to be working with private equity firms looking to buy banks, and in the next year or two several U.S. regional lenders could end up in the hands of buyout funds, banking analysts said.

“I can’t picture a 5,000-branch bank coming out of this. But could I see 300-, 400-, 500-branch networks stitched together? I think so,” said Seamus McMahon, chief executive of bank consulting firm McMahon Advisory LLC.

“Private equity firms are going to have a lot of influence.”

As real estate markets continue to crater, many of the 8,300 U.S. banks will suffer, and some will fail.

Private equity funds, meanwhile, have roughly $1 trillion of untapped funds at their disposal.

Some buyout funds are dipping their toes in the water now.

Firms including Wilbur Ross’s WL Ross & Co, Carlyle Group [CYL.UL], Blackstone Group (BX.N) and Centerbridge Partners teamed up to take over Florida-based BankUnited in a government-assisted deal announced on Thursday.

The funds put in $900 million of their capital, and are receiving support in the deal from the government.

Earlier this year, private equity firm J.C. Flowers & Co got together with other investors to take over assets of failed mortgage lender IndyMac.

In December, MatlinPatterson Global Advisers LLC agreed to invest in Flagstar Bancorp Inc (FBC.N).

After winning the auction for BankUnited, the group led by former North Fork Bank head John Kanas intends to continue growing through further acquisitions that could be rolled into the new bank once it is fixed.

One of the targets could be BankAtlantic Bancorp Inc (BBX.N), a person familiar with the consortium said. The source is anonymous because the plans are not public.

BankAtlantic bristled at the suggestion it would ever be a target. “We would think that BankAtlantic would want to buy BankUnited, rather than the other way around,” Chairman Alan Levan told Reuters.

KNIFE FALLEN FAR ENOUGH

From private equity’s perspective, the timing may be better now than last year, when private equity firm TPG [TPG.UL] lost big from its investment in Washington Mutual.

“Private equity firms are getting more comfortable that the knife has fallen far enough with the banks, that they are not going to get burnt,” said Gregory Lyons, co-chair of law firm Goodwin Procter’s financial services group.

In assisted deals such as BankUnited where the investors have a loss-sharing agreement with the Federal Deposit Insurance Corp, deals could still go bad if the recession deepens.

“If what we see is 10 percent unemployment this year and 11 or 12 next year, then some of these deals are going to go very badly wrong,” McMahon said.

Private equity firms have to structure their deals carefully to stay below thresholds that would subject their entire firms to onerous banking regulations.

So as many as eight investors pitched in to buy BankUnited. The largest stake holders are Ross, Carlyle and Blackstone, each holding between 20 percent and 24.9 percent, below the level they are deemed to be in control, the source said.

BankUnited also drew a bid from Toronto Dominion Bank (TD.TO), but the private equity consortium emerged the winner.

“I am hoping this would demonstrate to the skeptics that private equity can be the lowest-cost solution,” the source familiar with the consortium said. (Additional reporting by Dan Wilchins; Editing by Ted Kerr) (For more M&A news and our DealZone blog, go to www.reuters.com/deals)