Where Are All The PE Bank Deals?

Banks, even the problem ones, provide a chance for buyout shops to buy cheap deposits that can be grown and loaned out for decent returns. But buyout shops appear to be staying away.

There have been 140 M&A transactions involving U.S. banks so far this year, raising about $2.8 billion. This is down from last year when 263 banks were sold, valued at $4.6 billion, according to data from Thomson Reuters.

Of that total, however, just a handful have involved private equity sponsorship. Thomson Reuters puts the number at roughly five, although sources suggest it’s a bit higher (all depends on your definition of private equity, I guess).

Warburg Pincus and THL Partners recently announced a combined $278 million investment for a 40% stake in Sterling Financial Corp. However, their investment is conditioned on Sterling raising at least $720 million of capital. Moelis Capital Partners has applied to buy a stake in Opportunity Bank, a Texas lender with $64 million in assets, according to Bloomberg.

So what happened to all the bank deals that were expected? First, many of the troubled banks are small, typically having $10 billion in assets or less. But the time needed for buyout shops to conduct due diligence can take several months, regardless of whether the lender is big or small.

It generally takes the same amount of time to consummate a $20 million bank deal as it does a $200 million bank deal, one private equity executive said. “You will not move the deal on a $1 billion fund with a $20 million deal,” one private equity executive said.

Also, there are only a small number of PE execs with the experience needed to run a bank. Some buyout shops have considered hiring executives to start their own banks because the diligence is too long. Denovo banks take a long time to get up and running, and the FDIC has been reluctant to approve new bank charters, private equity sources said.

Still, some blame the ownership restrictions imposed by the FDIC, which requires private investors to hold a higher capital level than bank buyers. “The regulators are still wary but there will be more [PE deals],” one banker said.