With capital to spend, private-equity investors are slowly following the public market back into the waiting arms of struggling banks.

Last week two Oregon strugglers, Cascade Bancorp in Bend and West Coast Bancorp in Lake Oswego, announced recapitalization deals that involved private-equity firms. Also, PrivateBancorp Inc. in Chicago, which had been grappling with commercial real estate loan troubles, completed a public stock offering and placed a big chunk with one of its existing private-equity owners.

Donald Marron, whose Lightyear Capital LLC agreed to inject $40 million into Cascade, said that his team has met with roughly 150 management teams at midsize community banks in the past year.

"It is a very good time to consider investing in banks," said Marron, the former chairman and chief executive of PaineWebber Inc. For one thing, potential sellers are being more realistic about price.

"There is much more receptivity to structuring something that is economically sound for the future than there has been before," Marron said. "And secondly, all the new business that is being done is good business. All these banks are building good books of new business."

Marron, Lightyear's founder, chairman and CEO, made his remarks at a SourceMedia conference in New York last week, before the deal with Cascade was announced. He would not discuss the deal for this story.

For months, there has been much talk about private equity returning to the banking industry. Many such investors were said to be focused on buying banks on the cheap and using them as vehicles to buy failed banks from the Federal Deposit Insurance Corp.

But until now there had been very little movement. Potential regulatory hurdles as well as uncertainty about when the market would bottom, gave private equity pause.

Observers said one reason that investors have begun to warm to the sector again is that they are more comfortable making infusions alongside public capital raises — and such stock sales became an option for troubled banking companies about two months ago.

"The presence of both makes the other side more comfortable," said Ralph F. MacDonald 3rd, a partner at the law firm Jones Day.

Indeed, Lightyear's commitment to invest in the $2.27 billion-asset Cascade is contingent on the company getting $25 million from David F. Bolger, Cascade's largest investor, and Cascade raising an additional $85 million.

Some observers said there is also a sense that the window of opportunity for private-equity firms in banking is shrinking.

"The private-equity folks have been trying to gauge the bottom for months, but they realize that they can't hold off forever. I think they are ready to start placing some bets," said Wesley A. Brown, a managing director at the Denver investment bank St. Charles Capital LLC. "They want to get rock-bottom pricing, but they also want to do it soon enough that they will be able to get the money to work. … I think the private-equity logjam is beginning to break."

Brown said his firm is advising several private-equity firms that are ready to invest in banking companies. Earlier this year, he said, the relationship between private equity and regulators was tense, particularly over the summer, when the FDIC proposed holding banks bought out of conservatorship by private equity to higher-than-normal standards.

The two are now starting to understand each other, though, he said. "It was a major barrier, but I think there has been enough dialogue now," Brown said. "The regulators' concerns are starting to be understood."

Timothy Coffey, an analyst at FIG Partners LLC, said he was not surprised that two of the earliest deals were both in Oregon. He said that the next glut of failures will likely be in the Pacific Northwest, and the private-equity firms will try to use Cascade and West Coast as vehicles to scoop up the wreckage.

"This is going to be the next place for the FDIC to close banks. There are a lot of banks in that area that are struggling," Coffey said. "So there is likely a push to get in there and get their operating plans in place."

As well, the marginal improvements of credit quality at some banks and the ability for others to raise common equity through stock offerings are giving private equity confidence in the idea that the industry is at the bottom, or at least near it.

"For awhile, I didn't blame them for staying on the side. It is hard to justify investing in what appears to be a bottomless pit," Coffey said. "But we are starting to see some signs of recovery."

Pat Fahey, the chairman and chief executive of Frontier Financial Corp. of Everett, Wash., a fellow Northwest struggler, said that he has met with more than 40 potential investors since the beginning of the year and has noticed a change in tone in the most recent meetings.

He said he thinks the newfound enthusiasm in investing in the $4 billion-asset company is in part because of the early stages of recovery of the larger economy as well as the massive amount of combing of its portfolio that has been done by both regulators and in particular by the blank-check company SP Acquisition Holdings Inc., which was expected to buy Frontier. That deal was called off because it could not get regulatory approval in time.

"If there is a loan portfolio that has had more scrutiny than ours, I'd like to know," Fahey said. "But it has been good. Even with the deal that didn't go through, all the examination has given us more clarity of what is there."

Fahey said the change in investor interest is noticeable, especially after sitting across from so many uninterested investors this year.

"They are approaching us for one; there is a significant difference in response and reception. The meetings we are having are longer, there is more request for follow-up information," Fahey said. "So, I am optimistic. It just feels real this time."

Last week, PrivateBancorp announced that GTCR Golder Rauner would supply $46 million of a $175 million capital raise following a quarter that saw a sharp decline in credit quality. GTCR struck its relationship with Private in November 2007, when it invested $100 million into the company as it embarked on a growth strategy. That investment was converted from preferred shares to common equity in the second quarter.

Ariel Investments Inc., an investment firm in Chicago that already owned a large stake in Private, also bought a "significant portion" of the recent stock offered by Private, a spokesman said.

Last week Seacoast Banking Corp. of Florida in Stuart announced that it had entered into a definitive stock purchase agreement with a unit of CapGen Financial Partners, a private-equty firm founded by former Comptroller of the Currency Eugene A. Ludwig, for a $13.5 million investment. CapGen's intention of investing in Seacoast came in August when the company announced a common stock offering. That offering netted the company $9.8 million.

Seacoast said CapGen has filed to become a bank holding company since it will own 10.2% of the company.

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