It has been an up-and-down year for start-up banks.
Early in 2007 it was common for start-ups to open their doors with record levels of capital as money poured in from both local, well-heeled individuals and out-of-town private-equity firms that in recent years had come to view start-ups as can't-miss investments.
But as the year comes to a close, many start-ups are suddenly scrambling for cash. The local investors are still around, but industry watchers say the private-equity firms that had eagerly sought out start-ups are turning their attention to small, established banks that need capital infusions.
The shift has been driven by a drop in the valuations of publicly traded and privately held banks. While banks have fallen out of favor with many investors in the wake of the mortgage crisis and subsequent credit crunch, some private-equity investors have taken advantage of depressed valuations and bought stakes in established banks for about what they would have invested in a start-up — without having to wait for the bank to mature.
"A de novo often takes one to three years to start making money," said Shiv Govindan, a managing director at Resource Financial Institutions Group in New York. "If you can invest in a bank that is profitable immediately with the same valuation, why not do that instead of waiting for several years for a profit?"
Resource Financial has raised $65 million to invest in banks, and Mr. Govindan insisted it is not giving up on new ones. But at the moment, he said, the best investment opportunities are in existing banks that are solid performers but whose values, fairly or unfairly, have been depressed by market conditions.
"Because of all the negative news on the sector … the best banks have been sold off along with the weaker banks," he said. "So if you can provide the best banks with capital right now, you can get a great valuation."
One start-up suddenly having a hard time raising capital is Founders Bank and Trust in Leesburg, Va. In mid-November its organizers thought they had met their capital goal of $25 million and seemed on pace to open the bank by the end of this quarter.
But then a private-equity investor withdrew its commitment, leaving Founders' organizers with only $9 million and facing an uncertain future.
Fletcher Jewett, one of the organizers, declined to name the private-equity investor. In an interview last week he said his group is now considering everything from switching to a finance-company model or redrawing a business plan for a bank that requires less capital. "We have the time, but I don't know if we have the resources to continue to go on," he said. "The capital has really dried up. It's been very difficult."
To be sure, not all start-ups are struggling to raise capital. CapStar Bank in Nashville announced this month that it raised $88 million — the most ever for a Tennessee bank in organization, with 70% coming from local investors and the rest from the private-equity firm Corsair Capital Management LLC. And California Republic Bank in Newport Beach recently announced it raised $52 million from roughly 300 local shareholders — the most ever for a California bank without assistance from institutional investors.
Lee Bradley, a managing director in the Atlanta office of Commerce Street Capital of Dallas, said some bank organizers are becoming skittish about accepting investments from institutional because they are more likely than local investors to back out at the last minute. In the near term it appears new banks will have to rely more heavily on their communities to raise capital, he said.
"Local funding is going to be the only way you can count on for sure, but you still have to work for it," Mr. Bradley said. "That money is still there. It just takes longer to get and you have to be prepared to have more shareholders."
With private-equity investments diminishing, bank organizers are increasingly reaching out to investment bankers.
"We are getting phone calls almost every day from people asking for help," said Howard Levinson, the chairman and chief executive of Western Financial Corp. in San Diego. "Some funds had told organizers to count on them for $1 million or $2 million, and that they would write a check later. So the organizing bank counts on it, only to find out that when they are ready to close, the group has changed its mind."
Paul Stephens, an associate in the Houston office of the investment banking firm Carson Medlin Co., said he is even hearing from his competitors.
"We've had other investment bankers calling us looking for investors to get in on their de novos," Mr. Stephens said. "That's a bad sign when they are willing to share their fee. It just shows it's really tough right now."
Still, while private-equity managers may be shying away from start-ups, they are not writing them off completely. Mr. Govindan at Resource Financial said that if a bank has a proven management team and is in an economically healthy region of the country, he will certainly look at it. Besides, he said, "A lot of investors in this space are pulling out of it, and that creates more opportunities for others who want to buy privately held securities."
The situation is very similar for Commerce Street Capital, which invests its $6.5 million Genesis Bank Fund in both start-up banks and existing banks. Carla Brooks, a managing director with Commerce Street and the fund's chief executive, said the company is now looking a little harder at existing banks, but, like Resource Financial, it will still consider start-up banks.
Commerce is seeing some excellent opportunities with banks in which it has previously made investments, Ms. Brooks said.
"We've been adding to positions with some of our service equity partners because prices have been so attractive," she said.
She added that the fund will not take a controlling stake in a company, because it does not want to file as a bank holding company.
