Private Equity Deals Pile Up in Quiet Revolution

Complaints over regulation, stories about buyout groups dissolving and returning funds to investors, and deal activity that remains relatively soft make it seem private equity was the revolution that never happened in banking.

But, in fact, the deals have piled up over the years. Data from SNL Financial shows more than 150 private-equity purchases of stock and other securities issued by banks since 2008. The table here, which shows investments of more than $20 million by a group of active firms, covers more than $6 billion of capital infusions alone.

Private-equity firms interested in buying low in the financial sector have encountered a range of challenges. Banking is heavily regulated, unlike other industries where they might put their money to work. Banks have managed to raise hundreds of billions of dollars in fresh capital without them. They’re vastly outnumbered by healthy banks with the wherewithal to compete for the most attractive targets.

Last spring, Wilbur Ross, the chief executive of WL Ross, a major private-equity player in the bank space, lashed out against “draconian” restrictions imposed by regulators against investors like him. He challenged the view that private equity has incentives to ladle on risk because of relatively short-term horizons for investments, noting that career bankers were at the helm when the industry tumbled into crisis.

Despite the hurdles, private equity, particularly firms with experience in banking, has found many investments that it likes. Some have produced big paydays already. Ford Financial would roughly double its money in Pacific Capital’s (PCBC) pending sale to UnionBanCal, for instance. (Gerald Ford’s firm bought its majority stake in the Santa Barbara company in 2010.)

Within certain strata, the impact of private equity has been especially pronounced. Excluding North Carolina’s six biggest banks, for instance, financial institutions with private-equity backing now control more than a fifth of the state’s deposits.

Many of the banks private equity has helped capitalize are themselves designed to be buyers, from the $12 billion-asset BankUnited (BKU) to roll-up machines like the $2.2 billion-asset Community & Southern Holdings (which has bought seven failed banks) and the $1.5 billion-asset Grandpoint Capital (eight whole-bank deals and one government-assisted).

Private equity is likely to play a role in the capital foundations of the industry for some time to come.