As banks and other financial services companies look for ways to profit by serving the country's estimated 40 million underbanked consumers, private-equity firms and hedge funds are scouting for opportunities in the sector as well.
Among those attending a conference on the underbanked this week were representatives from two such firms, Warburg Pincus LLC and Pequot Capital Management Inc. David Coulter, a managing director and senior adviser at Warburg Pincus, called financial services for the underbanked "an ideal setting for private equity."
"Firms operating in that space who think they can do it better are sometimes faced with a growth curve that is pretty demanding," Mr. Coulter, a well-known former banking executive, said in an interview Wednesday.
"We are looking across the sector broadly," he said. "I think there are real growth equity opportunities there."
Mr. Coulter sent a staff member to the Dallas conference on the underbanked - which was organized by SourceMedia Inc., the parent company of American Banker - and they have discussed some of the findings.
Banuestra Financial Corp., which offers check cashing, remittances, and other services to a predominantly Hispanic clientele from 12 Atlanta storefronts, is among the companies that have sought private-equity capital for expansion.
Drew Edwards, Banuestra's president and chief executive, said it was "fully registered … and set to price" an initial public offering in April when its underwriter backed out because of fears about the immigration debate. Banuestra then abandoned its interest in an IPO in favor of private equity, which Mr. Edwards characterized as "smart, patient money."
"As long as you continue to grow" a business, "it tends to be funded" by a private-equity firm, he said. "Any time there are 40 million consumers underserved, they are interested," he said.
Banuestra's partnership with SunTrust Banks Inc., a former shareholder, ended in February. It announced plans last year to buy a bank, but the deal was called off due to regulatory delays.
The company has not been profitable since its founding in 2001, and Mr. Edwards said a capital infusion would help it open new sites and increase its consumer base tenfold, to 240,000 people.
He differentiated the prospects for his business from those of the distressed subprime mortgage industry, which has drawn a recent flurry of bargain-hunting by investment outfits. Unlike that line, Mr. Edwards said, businesses targeting the underbanked are in growth mode right now.
However, Mr. Coulter used the subprime business as an analogy to explain private-equity firms' interest in the underbanked.
"Look at the subprime mortgage market and the returns those firms have been able to generate over time," he said. "You can find businesses that produce very, very attractive returns on equity. In part that reflects the risk of the sector."
Warburg Pincus is close to announcing a deal with a company that provides auto financing to prime and subprime customers, Mr. Coulter said. (He was the chief executive of BankAmerica Corp. in San Francisco when it was bought by NationsBank Corp. in 1998. From 2000 to 2005 he was the vice chairman of Chase Manhattan Corp. and its successor JPMorgan Chase & Co.)
Other private-equity firms, like Sequoia Capital in Menlo Park, Calif., and Austin Ventures, have already invested in outfits that serve the underbanked.
Another private-equity firm at the conference was mPower Ventures LP, an Austin company that was founded by Bertrand and Roy Sosa, who also started NetSpend Corp., a prepaid debit card company, in 1999. "In order to help billions, we have to make billions," Bertrand Sosa said. He and his brother decided to expand their activities in this field beyond NetSpend because the "card is like a screwdriver, and now we have to build the toolbox."
