Did BankUnited Break the Private Equity Logjam?

In the early days of the financial crisis, private equity saw a golden opportunity but needed a way in. So when a consortium of firms bought the $12.8 billion-asset BankUnited from the Federal Deposit Insurance Corp. on the Thursday before Memorial Day weekend 2009, the industry wondered if the logjam had in fact been broken.

Perception of the role BankUnited (BKU) played in paving the way for private equity's role in the recovery is conflicted. It certainly signaled to others that deals with the FDIC were doable, but the hype largely did not live up to the reality.

"Everybody thought there was going to be this tsunami of private equity deals; that the failed-bank resolution process was going to be dominated by these sorts of groups," says Lori Buerger, a lawyer at Schiff Hardin. "There have been some nice deals here and there, but it just hasn't turned out to be this 800-pound gorilla most people were expecting."

The BankUnited deal gave the industry a framework to build on, but not exactly one to duplicate, says Brennan Ryan, a partner at Nelson Mullins. At the time, Ryan was working on a deal with veteran banker Joe Evans to unite 26 institutional investors to raise $300 million to buy failed banks in Georgia. Using State Bank and Trust, Evans bought six related banks in July 2009.

BankUnited "getting done was a very positive event because it gave comfort to the other groups that the FDIC would work with them," Ryan says. "That is what we needed, because in early 2009 the regulators had no idea what would work, so you were just left to guess."

The BankUnited transaction stands out, not only because it was the first, but because it was a great deal. The group's bid included a steep discount to the failed thrift's assets and included a loss-sharing arrangement, where the FDIC agreed to cover 95% of the losses. The FDIC is required by law to go with the least costly resolution.

Some industry observers say the BankUnited deal's attractiveness could have hurt private equity's role in failed bank resolutions.

"I think banking regulators may have looked at how [the BankUnited] transaction was structured, with all the economic advantages to the buyer, and it gave them some pause. I think they wondered whether it was a good transaction for the system," says Joseph Thomas, a managing director at Hovde Private Equity Advisors. "It may have made it more difficult for private equity."

A fund managed by Hovde obtained a shelf charter from the Office of Thrift Supervision and bought the $282.2 million-asset Bay National Bank in Baltimore in July 2010.

By August 2009, the FDIC had issued a policy statement with parameters for private-equity involvement in failed-bank resolutions. The requirements included maintaining a leverage ratio of at least 10%, not selling the bank for three years and disclosure requirements. If the success of the BankUnited deal enticed some groups, the policy statement sent others running.

"Groups that understand the banking system and understand the regulatory system went ahead and did deals, but those who were not accustomed to the oversight may have dropped out," says Thomas Vartanian, a partner at Dechert. "It is fair to say that there were more players in the game before those rules were released."

The private-equity firms that pursued failed banks found fierce competition from existing banks. In general, private equity wanted to target the larger failures, but they were unable to bid as aggressively as strategic buyers. "Generally speaking, the typical failed bank buyer has been, was, is going to be a bank bidder," Buerger says.

"There was this belief that it was going to be a bonanza for private equity. That was misguided," Thomas says. "The strategic banks had an installed advantage."

There have also been fewer failures than what was forecast on the onset of the crisis. Instead, private equity firms turned their attention to recapitalizing struggling banks to avoid the bidding process.

"If you look back on the list of failed banks and almost failed banks, there are an awful lot of transactions that involved private equity," Vartanian says. "I think the answer is somewhere in the middle. It was not the sole panacea, but it certainly has been a viable source of capital."