Banks — and bankers — are clearly in private equity's sights.
"If you're an experienced banker who sold your company a few years ago at the height of the market and want to get back in the game, there would definitely be money to back you right now," said Charles Crowley, a managing director at Stifel, Nicolaus & Co. Inc.
Capital Insight Partners Inc., a Chicago investment bank, is recruiting experienced bankers to pair with private-equity firms that want to roll up failed institutions around the country.
It is also looking to connect with small, healthy institutions willing to use a jolt of capital to buy failing banks.
Though other investment banks are looking into similar arrangements, the 18-month-old Capital Insight aims to turn such matchmaking into the cornerstone of its business.
"We see this as a niche," said Eliot Stark, a managing director at Capital Insight. "We are actively trying to find the deals, find the equity and find those that are capable of executing on a growth plan."
So far, Capital Insight has three banking teams on board and is looking for more.
St. Charles Capital in Denver is also interested.
"It is a strategy that many firms are working on right now, including ours," said Wesley A. Brown, a managing director at St. Charles Capital.
"Regardless of the type of deal, when it comes to private equity, those firms need proven local management to drive a deal and make it succeed."
But while popular, the idea is not moving beyond the talking stage at many firms due to regulatory uncertainty.
Many private-equity investors are waiting to see how a recent proposal from the Federal Deposit Insurance Corp. plays out before putting any money into the industry, Brown said.
The proposal, issued July 2, calls for imposing tough rules on private-equity firms that buy failed banks. Such buyers would be restricted from selling a bank for three years and would have to maintain a 15% Tier 1 leverage ratio during that time — a much higher capital requirement than for traditional bank owners.
Regulators are concerned about private equity firms' lack of banking experience and their singular focus on achieving high returns.
But private-equity firms have sharply criticized the proposal as too restrictive.
"Those higher capital levels would reduce return on investment, and suddenly the banking industry looks a lot less attractive," Brown said.
Capital Insight is undaunted.
Jacob Eisen, Capital Insight's president, said that he expects the FDIC to reduce its capital requirement when finalizing the rules.
But even if it does not, the game plan at Capital Insight is designed to avoid restrictions specifically targeting private-equity firms.
The deal structures could vary, but the most likely scenario is that a private-equity firm would buy a significant stake in a small bank, then use it as a vehicle to bid on failed institutions, Eisen said.
The thinking is that the involvement of industry veterans from larger banks could make regulators more comfortable with the plan.
Adding validity to this model is Georgia banker Joe Evans' recent success.
With the FDIC's blessing, he orchestrated a $300 million capital infusion into State Bank and Trust Co. in Pinehurst so that it could absorb six failed banks that had been part of Security Bank Corp. in Macon. State Bank had just $36 million of assets, but it took on $2.4 billion of Security's $2.8 billion of assets.
Evans, who had once run a $1.8 billion-asset bank in Atlanta, became State Bank's chairman and chief executive officer as part of the transaction.
He has said that 26 institutional investors participated. None are private-equity firms, and each owns less than a 10% stake in State Bank.
Even so, Eisen said he thinks the approach could work for private-equity firms that are interested in rolling up failed banks.
"It seems like the surefire way to go," Eisen said. "The real challenge is in getting a charter and the FDIC insurance. Once you get those two, all kinds of possibilities open up."
In looking for banks open to capital infusions, Capital Insight is targeting healthy ones with less than $100 million in assets and de novos that have yet to reach profitability.
As a group the investors could end up with more than 90% ownership, but no single investor would have so much that it has to register as a bank holding company.
Eisen said buying a failed bank directly from the FDIC is a tougher option — even though a consortium of private-equity firms managed to do so in the case of the failed BankUnited in Coral Gables, Fla.
One of the bankers working with Capital Insight — who asked not to be named — said he recently tried that same route with the failed Founders Group in Worth, Ill., but was unsuccessful.
"The chartering process makes it difficult," he said. "For the next target, the hope is to structure the team around a smaller institution as the vehicle."
The third-generation Midwest banker said he has been on the sidelines since his family sold its company in 2006, but is ready to return.
"There is an uniqueness in the market that many of us haven't seen before, and we plan to take advantage of the opportunities while the gettings are good," he said. "That window will eventually close."
Eisen said Capital Insight has no committed capital partner. Rather, it has a handful of potential investors waiting for a deal.
Striking the first deal is the tough part, according to the banker.
The plan is to build a Midwest bank through acquisitions, with the goal of growing it to $4 billion of assets, he said. The exit strategy is either selling it or going public in four to six years.
Terry Keating, a managing director at Amherst Partners LLC in Chicago, said the need for a stable regulatory framework is the main holdup in securing capital for such plans.
"We are having discussions about this sort of thing at our firm often. There is a lot of interest out there: displaced bankers looking for capital, private equity looking for good management," Keating said.
"But my sense is that people have been sitting on the sidelines because of the big question mark surrounding the regulatory environment."