Will Private Equity Succeed by Investing in Failed Banks?

Analyst: Bill Bradway

May 28, 2009

Private equity investors, lead by dedicated investing entities that are not institutional asset managers, have been evaluating the banking industry’s expanding list of troubled institutions. So far in 2009, there have been two private equity FDIC-assisted takeovers of failed institutions. In March, a private equity group invested $1.3 billion in the FDIC-controlled IndyMac Bank (which failed in July, 2008). On May 21st, the FDIC seized BankUnited and immediately sold it to an investor group, which included John Kanas, the former CEO of North Fork Bancorp, five private equity and three institutional investment firms.

Federal regulators have wrestled with the private equity (PE) ownership issue, not wanting to take on a new, non traditional owner that may turn out to be a future mistake. To avoid bank holding company regulations, each private equity investor must own less than a 24.9% stake. The FDIC announced that it plans to publish guidelines for PE firms that are interested in buying failed institutions.

• What are the likely developments for private equity bank deals?
• Are private investors scooping the market?
• Which weakened banks are potential targets for private equity deals?
• How should one evaluate the upside or downside of investing in a troubled bank?
• What will be the consequences for their FinTech vendors?

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