Despite government efforts to entice private-equity investors into the failed-bank market, most are expected to focus on purchasing assets, rather than whole institutions.
The two big reasons: regulatory scrutiny and the fact that bank assets continue to fall in value.
"I think ultimately you'll see more private-equity money going toward simply buying bank assets, not the whole bank," said Roger Lister, the chief credit officer of DBRS Ltd.'s financial institutions group.
The New York private-equity group Corsair Capital LLC said the banking sector has not been attractive. Corsair led a $7 billion investment in National City Corp. in April for $5 a share. However, due to a change Corsair made in its investment agreement two months after the deal, it lost no money when PNC Financial Services Group Inc. made a deal last fall to buy National City for $2.23 a share.
"It's complex, it's regulated, and it's inherently levered, so traditional private-equity firms cannot lever their investment," Richard E. Thornburgh, vice chairman of Corsair, said in an interview last week.
Seven private-equity firms recently agreed to buy IndyMac Bancorp from the Federal Deposit Insurance Corp., and federal regulators have made it easier for nonbanks by creating so-called shelf charters that allow firms to clear some of the regulatory hurdles before bidding on a bank.
"There are a number of businesses that are going to come up for sale," Mr. Thornburgh said.
Observers said how soon and how deeply private-equity investors jump into bank assets will depend not just on whether they believe the market for such investments has hit bottom, but also on regulators' attitudes.
"There will be more and more money going after banks," Jim Gardner, co-founder and chairman of Commerce Street Capital LLC, said in an interview this month.
Though he stopped short of calling an outright bottom on bank assets, he said that could happen this year, and therefore "it's no longer too early to invest in banks."
Gary Townsend, the chief executive officer of Hill-Townsend Capital LLC, said he does not see a bottom yet, though the fact that private equity players bought into an operation as deeply troubled as IndyMac with the intention of rebuilding could indicate the investors expect a bottoming out by yearend.
In the IndyMac deal, a group led by Dune Capital Management LP paid $1.6 billion in cash to fold the target into a new holding company.
In exchange, the FDIC agreed to share 80% of the losses on roughly $13 billion of loans and retain an 80% stake in a separate $2 billion portfolio of mostly construction loans.
"There are literally trillions of dollars in private-equity money sitting out there waiting to be deployed," Mr. Townsend said in an interview this month. "And the interest in IndyMac is a good sign that some of that money will get put into banks."
Michael Blumenthal, a partner at the law firm Crowell & Moring LLP and an expert on the distressed loan market, said there is substantial demand among private-equity investors, though they are still looking strictly for steep discounts.
"The reason that there wasn't a lot of this flow last year was because the institutions weren't willing to sell at rational prices," he said in an interview last week.
Private-equity firms say they will watch regulators carefully for signs of encouragement.
"We know private-equity players that are looking at multiple investments," Cassandra Toroian, the president and chief investment officer of Bell Rock Capital LLC in Rehoboth, Del., said in an interview this month.
"The only thing holding them back, I think, is that they wonder if, under the Obama administration, more regulatory rules will change — changes that might be favorable and worth waiting for."
John Kanas, the former CEO of North Fork Bancorp who now oversees financial investments at the private-equity firm W.L. Ross & Co., said the mounting commercial real estate losses at several regional banking companies is not as severe a problem as the housing collapse but nevertheless will beat up many companies for much of this year.
The IndyMac deal signaled "a substantial shift in attitude by regulators" toward agreeing to loss-sharing deals, Mr. Kanas said. "That's what's going to bring in more private investments to the sector."
This month his firm agreed to buy a majority stake in the $83 million-asset First Bank and Trust Co. in Indiantown, Fla.
James Wigand, a deputy director in the FDIC's division of resolutions and receiverships, said in an interview this month that the market has "heavily discounted" the value of bank assets.
Mr. Wigand also said his agency anticipates a rebound in the IndyMac assets in which it shares risk, allowing taxpayers to share in future profits. The FDIC valued the deal at $13.9 billion, the amount of assets in the new bank holding company.
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Corrected January 27, 2009 at 8:54PM: An earlier version of this story incorrectly implied that Corsair Capital lost money on its investment in National City. Because of the structure of the initial investment and a change in the agreement two months after that investment, Corsair lost no money when PNC bought Nat City.