With many banks struggling under the burden of bad housing loans and rising consumer delinquencies, rules forcing owners of federally insured institutions to accept holding company regulation by the Federal Reserve or the Office of Thrift Supervision are discouraging PE investment in banks, they wrote. Consequently, "in addition to increasing the industry's cost of capital, these limitations increase the risk that taxpayers will ultimately be called on to assume some of these burdens," they said.
The truth is, however, other PE firms are finding ways to provide much-needed financing to banks despite the decades-old restrictions intended to keep banks separate from conventional commercial firms. In April a group led by PE firm Corsair Capital LLC acquired a 70% stake in Cleveland's National City Corp. for $7 billion. Also that month, a TPG Capital-led group invested $7 billion in Washington Mutual Inc. giving TPG a 13% stake.
Federal law stipulates that ownership of 25% or more of a bank's voting stock must be viewed as a controlling interest and any investment stakes under 5% are viewed as passive. Between those levels, regulators have discretion to decide what stake and degree of involvement will be deemed as control.
For most PE investors, a noncontrolling stake is an unattractive option because they're used to having a certain amount of influence. Instead, many opt for a second approach: creating separate funds to control the bank. The new funds become bank holding companies subject to bank regulators' oversight, but the original funds are insulated. A third option is to diversify control among investors so no single fund triggers holding company thresholds, though the trick here is to build a structure that allows investors to sit alongside each other without being viewed as acting in concert.
The more creative means of investing proves the old adage, where there is a will, there is always a way. - Bill McConnell
See the opinion column from The Wall Street Journal
See related story from The Deal: Barbarians at the bank
