Tuesday, April 22, 2008
Private Equity Snapp up Ailing Banks
Cleveland-based National City Corp.'s announcement Monday that it is getting $7 billion in capital to shore up its balance sheet is the latest sign that private-equity firms think there is big money to be made by investing in banks pummeled by bad loans and the economy. Private-equity firms raised about $550 billion of capital in 2007, adding roughly $150 billion more in the first quarter of 2008, according to data provider Private Equity Intelligence Ltd. The biggest firms have raised staggering amounts of capital, with KKR recently closing on a $17.6 billion fund and Blackstone amassing a $21.7 billion fund last year. Snapping up stakes in ailing banks represents a shift away from the big deals of recent years in which private-equity firms dominated the merger boom with a string of blockbusters. The credit crunch has shut down financing markets for leveraged buyouts, leaving the funds flush with cash. The recent bank deals are different than the traditional deals that private-equity firms typically hunt down. For example, private-equity players are minority shareholders in the banks, potentially limiting the sway that they can hold over management and strategic direction. The reason: Regulators don't permit nonbank investors to take a voting stake of greater than 9.9% in a bank. In most LBOs, private-equity firms buy the entire company, load it up with debt, and slash costs before taking it public or selling it to other investors. At smaller banks, private-equity firms are likely to increasingly use "special purpose acquisition companies" -- or SPACs -- to invest, says Gerard Comizio, a partner at law firm Paul Hastings Janofsky & Walker LLP. These so-called "blank check companies" raise money from public investors and then are free to use those funds to buy companies. There are 71 SPACs in the market for deals, and many are eyeing banks and other financial institutions, says Melissa Roberts, a vice president of quantitative research at Keefe, Bruyette & Woods.