StoneCastle Financial (BANX), which recently went public, believes it has the solution for small banks struggling to access capital markets.

Making sure healthy community banks can raise capital has become a bigger concern for regulators, bankers and industry trade groups. Thousands of privately held banks, along with thinly traded names, have added challenges raising money.

For many of those banks, it is difficult and costly for a management to raise capital, says Joshua Siegel, StoneCastle's chairman and chief executive. Enter StoneCastle, which completed its initial public offering last month.

The New York company provides passive, long-term capital to healthy community banks. Investors who want a piece of the action can buy stock in StoneCastle rather than working directly with the banks. This allows investors to exit simply by cashing out of StoneCastle, eliminating "the constant view of when will the bank go public or sell," Siegel says.

"These barriers have always existed but they have hardly ever been tackled," Siegel adds. "Investors wonder, 'how do I get out once I am in?' "

StoneCastle's approach is similar to publicly traded real estate investment trusts, which own and sometimes operate income-producing properties, though Siegel says the strategy is unique for the banking industry.

Other investment firms, such as Carlyle Group (CG) and Blackstone Group (BX), are publicly traded, though they focus on more than just the banking sector.

In recent years, private equity has flocked to bank stocks, particularly after the financial crisis when investing in the sector was cheap. Generally, private equity companies like to exit in within five to seven years, but that has been problematic as bank consolidation remains sluggish.

StoneCastle's investors also expect a lower return of 8% to 10% compared to the 25% that private equity firms want. This makes taking a capital infusion from StoneCastle less costly and more attractive to bankers, Siegel says.

"The reaction we have received bank CEOs has been very strong," he says. "This is reasonably priced capital that has no time line."

The idea for StoneCastle began to materialize more than two years ago when representatives from the Treasury Department and the American Bankers Association mentioned in separate meetings that some of the healthiest community banks had trouble accessing capital, Siegel says. He realized that finding a new way to provide capital to those banks had to satisfy three entities: regulators, bankers and investors.

The ABA, through its Corporation for American Banking affiliate, issued an exclusive endorsement to capital investments made by StoneCastle. The association began working with StoneCastle because boosting access to capital is one of the biggest requests it receives from members, says John Wolff, an executive vice president at the ABA.

"StoneCastle was seeking returns that are compatible with the industry," says Helen Sullivan, a senior vice president at the ABA. "Other investors that have tried to come into the market have had a disconnect with the returns they expected."

Some bankers want additional capital to fund expansion plans or to meet new regulatory requirements, says Frank Sorrentino, chairman and CEO at ConnectOne Bancorp (CNOB) in Englewood Cliffs, N.J. The $1.1 billion-asset company went public in February, raising roughly $50 million. Sorrentino says that, by most investment banking standards, his company's haul was a small sum.

"If you're looking to raise $8 million, the capital markets are really closed to you," Sorrentino says. "Banks have gone to their boards and their friends and family to raise money for growth or expansion but … sources of capital are few and far between."

Small banks often fail to make sure that an investor's expectations for growth and returns match up with management's vision, Sorrentino says. That's where a company like StoneCastle, which isn't looking to make management changes or influence the bank's strategic direction, can help, he says.

(Sorrentino has worked with Siegel through StoneCastle Partners, which is the parent company for StoneCastle Financial's external advisor.)

So far, StoneCastle has invested in six community banks after raising about $110 million from the IPO. The company, which has a pipeline of about $1 billion of potential investments, is looking to invest in "nice, stable banks," Siegel says. StoneCastle is also buying assets from the Treasury, which is auctioning its remaining stakes in banks from the Troubled Asset Relief Program.

StoneCastle considers factors, including the strength of a bank's management team and balance sheet, before making an investment. Perhaps more importantly, the company studies the bank's local economy. StoneCastle will "avoid banks in markets that are challenged or recessionary in nature," Siegel says.

Red flags include rising bankruptcy rates, sluggish job growth or economies that are heavily dependent on one industry. Still, rapidly growing markets that are hyper-competitive are also problematic.

"A bank is a reflection of its local market," Siegel says. "That's where bank investing has broken down in the past."

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