When trouble first started hitting Wall Street, it looked as if a golden opportunity was beckoning for private equity and distressed investors who were already sitting on piles of cash just waiting to be deployed into high-quality investments. Over the last 18 months, the financial services sector has been rocked by failures, shot-gun marriages and now government rescues, but with only a few exceptions buyout shops have been content to watch and wait from the sidelines.
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Most private equity firms stayed patient and watched a few peers jump in, often with disastrous results. Take for example:
- TPG Capital's investment in Washington Mutual Inc.
- Thomas H. Lee Partner's buyout of MoneyGram
- Corsair Capital LLC's investment in National City Corp.
But things weren't always so. At the beginning of the year, before the crisis took a dramatic turn for the worse, rumors swirled that financial sponsors were on the verge of following sovereign wealth funds into bank investments. The Deal's Vipal Monga outlined the buyout world's preparations at the time:
Keefe, Bruyette & Woods Inc. analyst Melissa Roberts estimated in an April 18 research report, about 42 U.S. financial institutions may require capital infusions this year, including regional banks, real estate investment trusts and mortgage insurers...
Rumors had Kohlberg Kravis Roberts & Co. backing a possible bid by Fifth Third, while Warburg Pincus was also a rumored bidder. And other firms have been setting up for an expected flood of investment opportunities. Carlyle Group recently hired Olivier Sarkozy, the former global head of UBS ' financial institutions group, to invest in financial services. Master of distress Wilbur Ross snapped up John Kanas, the former CEO of Melville, N.Y.-based North Fork Bancorp (who cashed out in a 2006 sale to Capital One), to help WL Ross & Co. LLC identify and invest in distressed financial institutions.
So what happened to crush their enthusiasm?
A number of things: the failure of Bear Stearns Cos. followed by the disasters of the past month gave them pause along with signs that things might be worse than anyone imagined. Market volatility and the sheer fragility of the financial sector may have also deterred them. Bank deals are also accompanied by a heavy regulatory burden. While the Federal Reserve has suggested it will loosen some of those rules, putting money into banks is hardly straightforward. And with the credit markets tighter than a drum, private equity firm have been unable to get financing.
Still private equity firms have a ton of capital and won't sit out forever.
The few cases of PE firms buying into banks have been successful -- at least before this last round. For example, KKR nearly quintupled its $221 million investment in First Interstate Bancorp of California, made in 1988 when Wells Fargo & Co. bought First Interstate in 1996. Warburg Pincus, which bought a 20% stake in Mellon Bank Corp. in 1988 for $158 million and a 12.5% stake in Dime Bancorp in 2000 for $238 million, profited handsomely from both of those deals. The Mellon investment produced a $1.47 billion return while the firm's $238 million investment in Dime was valued at $750 million; less than two years later, Washington Mutual bought Dime for $5 billion. Even TPG, so recently burned by WaMu, had better days in banking. TPG's David Bonderman also has a history in banking. In 1988, Bonderman and Robert Bass, founder of PE firm Oak Hill Capital Partners, bought Irvine, Calif., thrift American Savings Bank for about $500 million. Ironically the two sold it to Washington Mutual in 1996 for $1.4 billion.
And more recently, some top dealmakers in the private equity world have been talking about taking another look at the banking sector in light of the government's $700 billion bailout. - George White
See The Deal newsweekly story on PE/bank investment
See Dealscape post on Moneygram
See Dealscape post on PE looking at banks again
See Dealscape post on TPG losses on WaMu
