The private equity backers behind BankUnited Inc. could start a new trend if they decide to unload the Florida company they bought three years ago.
In May 2009, BankUnited became one of the first failed banks to be taken over by private equity. Since then, private equity has slowly come to terms with the reality that regulatory and economic challenges will stymie growth for the foreseeable future.
Such a dismal outlook, paired with the fact that most private equity investments typically have a shelf life of three to five years, give some teeth to growing speculation that the $11 billion-asset company could be on the block, industry observers say.
And others could soon follow.
"If this sale goes through it will change the landscape in terms of how PE firms look at bank deals in the future," says Carlos Arboleda, a managing director at COIaccess, a bank consulting firm in Florida. "One thing is for certain, this will be a trend-setter and will dictate future PE involvement."
BankUnited's shares stopped trading briefly Friday after reports surfaced that the Miami Lakes, Fla., company had hired Goldman Sachs Inc. to help it find a buyer. The move would represent a major change for BankUnited's owners, including veteran banker John A. Kanas, who had pursued an aggressive growth strategy in Florida and New York that involved branch openings and acquisitions.
By midweek, BB&T Corp. in Winston-Salem, N.C., and Toronto-Dominion Bank's TD Bank had emerged as the most likely suitors. Spokesmen for the banks said they would not comment.
It is unclear why BankUnited's management would consider a strategic about face. At least one published report said that the Federal Reserve Board had requested personal financial statements from certain principals as part of the company's planned purchase of Herald National Bank in New York.
Herald National also triggered a lawsuit, filed last year by Capital One Financial Corp. against Kanas, alleging that the proposed takeover would violate a noncompete agreement Kanas made with the McLean, Va., company. Capital One bought North Fork Bancorp, where Kanas was chairman and CEO, in 2006.
Kanas said in an interview with American Banker in July that he would stay on the sidelines and let Herald National operate independently at least until his noncompete contract expires this August.
Industry observers say that a decision to sell could be based largely on stagnant growth prospects and a decision by BankUnited's major investors to shift resources elsewhere. BankUnited's resuscitation took place before passage of the Dodd-Frank Act, the dissolution of the Office of Thrift Supervision and the Fed's decision to keep interest rates artificially low until 2013.
BankUnited has been seemingly skittish with acquisitions. Herald National is its only deal since a $783 million initial public offering last year. In comparison, Bond Street Holdings, a private equity backed entity in Miami, has snagged seven failed banks since its takeover of Premier American Bank in January 2010. Even Bond Street has been delaying an IPO it first announced last May.
"In general, the higher annualized return is in flipping banks quickly compared to waiting longer," says Kip Weissman, a partner with Luse Gorman Pomerenk & Schick. "PE has a short trigger."
"In light of expectations about the economic environment and opportunities available …it's hard in today's low interest rate environment that they can achieve what they want to," adds Chip MacDonald, a partner at Jones Day in Atlanta.
Kanas warned last May that it was getting difficult to complete acquisitions, adding that the Federal Deposit Insurance Corp. was too "lenient" in closing weak banks. "There should be massive consolidation, but we need a catalyst," Kanas said at the time. "If it's not the regulators, I'm not sure what it is."
Kanas declined to comment for this story. But a BankUnited employee told American Banker that Kanas seemed particularly disengaged in a meeting earlier this month with company staff. The employee, who asked not to be named, described Kanas' presentation of 2011 results and 2012 strategies as lacking the executive's typical engaging and dynamic style.
Other private equity firms may become just as disengaged as lackluster results become the norm, observers say.
Weissman says a well-run bank would max out at a return on equity of 11%, compared to a minimum of 15% for the "sexy banks in the mid-2000s" that included North Fork.
"In general, PE is interested in better returns than 10%," Weissman says. "PE serves more than one master. They're not only concerned with what is in the best interest of the bank, but what is in the best interest of their fund. This may have very little to do with a bank's prospects and more so a fund's particular needs."
Last month, Carlyle Group was reportedly looking to raise more money to invest in distressed banks. Carlyle was among the four main BankUnited investors, joining Blackstone Group LP, W.L. Ross & Co. and Centerbridge Partners LP.
Weissman says there are limited buyers for an institution of BankUnited's size, especially in Florida. Still, he says a loss-share agreement could justify a high premium, particularly the one between the FDIC and BankUnited, which had higher loss coverage compared to recent deals.
"Arguably those covered assets have a higher credit rating than the U.S., France and eight other European countries. …They're very valuable," Weissman says. "We're still nowhere near the top but since [BankUnited] bought at the bottom, they will be able to sell halfway to the top and make a nice profit."