The most likely to benefit from the Federal Reserve Board's move to relax the rules governing private-equity investments: small banking companies.
The change made small banks more attractive to larger investors, according to Shiv Govindan, the president of the New York private-equity firm Resource Financial Institutions Group Inc.
"Private-equity firms have a minimum amount they will invest in a deal," he said. "Before, they were limited to a 9.9% stake, so they had to go to a larger bank. By moving that hurdle from 9.9% to 24.9%, a bank can be half as big. For any given investor, a lot more banks will certainly be eligible for this investment."
Mr. Govindan said his firm not only will have more banks to choose from, but also will be able to increase the size of investments it already has made. "There are several banks that we are considering increasing our investment, because we are now able to."
Dory Wiley, the president and CEO of Commerce Street Capital LLC in Dallas, said it also intends to take bigger positions in banking and thrift companies.
Steve Stein, CEO of the Cincinnati private-equity firm FSI Group LLC, expressed similar intentions.
"There is a tremendous amount of work in these transactions," he said. "One of the challenges has been the amount of work relative to the amount of capital you can put to work. To the extent that you can put more capital to work for the same amount of effort is a plus."
Under the new rules, an investor can own up to a third of a bank or thrift's stock without having to register as a holding company — though no more than 15% can be voting stock. Previously, any investor owning more than a 24.99% stake had to register as a holding company.
The new rules also will let a private-equity investor sit on a bank's board without requiring it to be a controlling investor, and the investor can advocate for changes to the business.
The Fed's rules are designed to prevent unregulated investors from gaining too much influence over banks' boards and management teams. Though the rule change loosens the restrictions, the Fed said in its policy statement Monday that it does not expect investors to gain "any controlling influence over the management or policies of the banking operation."
Many banking and thrift companies are low on capital and struggling to raise it, especially those forced to dip into capital to cover large writedowns on investments in Fannie Mae and Freddie Mac preferred stock. The shares have lost nearly all their value since the government-sponsored enterprises were taken over Sept. 7.
Executives at the $2 billion-asset Capital Corp. of the West in Merced, Calif., would have liked the rule change to have come sooner.
Capital Corp. is in the midst of a $50 million public offering to shore up capital after being hard hit by bad loans in its residential loan portfolio. Thomas Smith, its director of marketing, said the company is committed to the public offering — its management team was meeting with potential investors Tuesday — though it would strongly consider an private-equity investment if it needed more capital.
The company would not mind having a private-equity partner sit on the board, Mr. Smith said, as long as the investor was "supportive of our core values, mission, and market, and [would] not just come in and turn us into the next profit-making machine."
John Blaylock, the associate director at Sheshunoff & Co. Investment Banking in Austin, said the rule change shoud generate more investor interest in banking and thrift companies, though loan problems could scare off some investors.
"There's still a bit of a fear factor in the market," Mr. Blaylock said. "The overriding concern [with investors] right now is the quality of the assets."
Others say now is a particularly good time to invest in the banking industry, with or without the rule changes. The private-equity firm J.C. Flowers & Co. bought a Missouri bank last month. (See related story.)
In an e-mail Tuesday to American Banker, Jay S. Sidhu, the former CEO at Sovereign Bancorp Inc. and now a bank investor, wrote that "opportunities are enormous" for his investment firm, Sidhu Capital Partners.
"We are actively looking at bank investments for the long term, partnering with good management teams and visionary boards," he wrote. "We are going through unprecedented times. The rules and landscape [have] changed more in the last few days than in the last decade."
Aaron Deer, an analyst at Sandler O'Neill & Partners, said the rule change is an "incremental positive," but not "a game-changer," for private-equity firms and banks. "It's just one more thing the regulators have pulled out in their arsenal to try to address the financial crisis," he said. "It helps at a time when banks need all the help they can get."