When private equity began circling the banking industry in the darkest part of the financial crisis, it seemed like they were in for a buffet of opportunity. Instead, many have either been left hungry or with indigestion.
The number of failed banks is a mere fraction of the amount industry observers had forecast and the pace all but slowed to a crawl last year. Traditional deals have remained spotty, with data showing 2011 as the worst year for M&A in decades.
"The banking sector has not been as robust of an area as private equity had hoped for when failures began to ramp up a few years ago," says R. Scott Siefers, an analyst at Sandler O'Neill & Partners LP. "You had an industry that needed capital and guys that could provide it. It should have been a much easier and happier marriage."
To be sure, there are several roll-ups backed by private-equity that have managed to strike deals for failed banks and open banks, but some industry experts say so many others have suffered a rude awakening. Their initial investment thesis from a few years ago doesn't fit so well under today's conditions.
"Some of the investors placed their money based on the idea that system was in a state of disarray and bargains could be reached," says Wesley A. Brown, a managing director at St. Charles Capital, a Denver investment bank. "I've brought some good transactions to these groups, but it just hasn't fit into their original investment thesis."
A lack of movement can cause tensions between investors and those tasked with executing, such as the chief executive. That's because there is pressure to spend capital since the investment horizon is typically three to five years.
"The investors want to see it deployed quickly," says Christopher Zinski, a partner at Schiff Hardin LLP in Chicago. "The earlier it is deployed, generally the higher return they'll get."
Zinski adds that private-equity-backed BankUnited Inc.'s flirtation with a sale, a few months shy of its third year in operation, might indicate that exits may not be as easy as some investors were expecting. BankUnited reportedly wanted $30 a share, but bidders came in below that. The company has since said it plans to remain independent.
"The BankUnited deal suggests it is not as easy as it used to be to exit," Zinski says.
"You used to call the investment bank, put the bank on the market, capture a premium and be done," Zinski adds. "That option is not as readily available, and there is no telling when the M&A market is going to come back. The ease of the exit is a lot more contingent on other things now."