A key chapter of the financial crisis private equity's rescue of BankUnited in Miami Lakes, Fla. has closed.
BankUnited disclosed last week that its private equity saviors had cashed out, selling shares through a series of secondary offerings that began in March 2013 and were made possible through the $15 billion-asset company's 2011 initial public offering. Four key backers, who helped veteran banker John Kanas buy the failed thrift with $940 million in capital, essentially doubled their investment.
Private equity is a business designed to make smart investments and exit after a few years in a way that makes money for clients. Still, BankUnited was a poignant moment for many of the players involved in the deal.
"The investment yielded a very high rate of return to us... but my emotions are mixed," Wilbur Ross, chief executive of WL Ross, wrote in an email. "I and the other sponsors have intense admiration and affection for [BankUnited's] management team and we will miss the ongoing intimate contact with them."
For Ross, the "only consolation" of cashing out is that he can now develop a stronger banking relationship with the bank. As an investor, his deposits at BankUnited were limited to $500,000. None of his other portfolio companies have commercial relationships, either.
Mixed emotions also exist for Kanas, who says the board is now looking to replace the seats held by the firms. The firms are expected to vacate those positions this year.
"I'll miss them all," Kanas said. "They've been extraordinary board members and brought a view to the company that was hard to find because of their global reach. They are all brilliant people... but it is good for the company to be free of the concentrated ownership."
Kanas is quick to recall the efforts that led to the BankUnited buyout. He had sold his last venture, North Fork Bancorp in Melville, N.Y., to Capital One (COF) in McLean, Va., in 2006 and was looking for a second act. He met with Ross in early 2008, sharing a handshake and agreeing to loop each other in as they searched for investment opportunities in banking. Initially, the men were looking at open-bank transactions.
"By watching banks collapse, I quickly came to the conclusion that buying into a bank without regulatory help was a bad idea," Kanas says. The idea of buying BankUnited came up early and often and Kanas jokes that, at the time, those involved pegged the thrift's capital need at $150 million to $250 million.
When BankUnited failed in May 2009, its capital hole exceeded $2 billion.
Kanas' conversations with regulators began in mid-2008. Rajinder Singh, a former North Fork executive and BankUnited's current chief operating officer, was deployed to California to study the structure of the private-equity backed purchase of IndyMac, which failed in July 2008. By March 2009, Kanas and Ross, along with Blackstone Group, Carlyle Group and Centerbridge Partners began assembling their bid.
The investors' affinity likely stemmed from the risk they were sharing, says Lance West, a senior managing director of Centerbridge.
"The world was really ugly," West recalls. BankUnited "was culturally broken. John and his team took this secondary buyer of junkie mortgages and converted it into a middle-market commercial bank in a short amount of time."
The BankUnited deal became a beacon for private equity looking for a way to capitalize on the significant disruptions across the financial services industry. Other bank investments followed, but few have been as successful. Subsequent loss-sharing agreements with the government were not as generous and other investors have struggled to create a real franchise following their government-assisted deals.
In that regard, it paid off for Kanas and his confederation to be early, West says, though the group "needed a strong stomach."
BankUnited eventually went public and bought a bank in New York, but the private-equity component of its ownership remained a big question mark. In early 2012, Goldman Sachs told BankUnited it could help find a buyer. The prices offered didn't satisfy the investors and the news of the infamous decision to court suitors didn't soothe concerns about private equity's eventual exit strategy.
"Some people believe there was something of a discount on the stock because of the uncertainty of private equity and when and how it would exit," Kanas says. "The market-check we did confused people."
Still, West says the investment has exceeded all expectations from an underwriting standpoint, though he declined to disclose the investors' initial projected return. He says that, given the conditions of 2009, that those initial projections were tempered by pessimism.
"When you underwrite in a period of gloom, you may not be optimistic," West says. "We were pretty defensive and the world has gotten better. It is hard to differentiate."
BankUnited's backers began to unload their interests last year through secondary offerings. In that regard, Goldman redeemed itself.
"Their pitch this time was that the market was anticipating that this final block would become available and that the stock would act better once it was cleared out," Ross said. It "was a correct idea as demonstrated by the fact that the stock went up in the after-market."
The private-equity firms sold their final chunks at $33.50 a share. On Wednesday, the stock was trading at $33.68, or roughly 185% of its tangible book value. "This was a dream private-equity deal," Kanas says.
"It was right out of the playbook and worked exactly the way it was supposed to," Kanas adds. "The regulators had their problem institution solved and it made the investors a lot of money. And it gave birth to an amazing company that is going to go on without them for many, many years."