Bava and Miller Discuss Private Equity and the Banking Crisis in PEI Manager Magazine
"Making Banks PE-friendly"PEI Manager
June 11, 2009 – Manatt co-chairman Gordon M. Bava and firm partner Craig D. Miller are interviewed for an article, “Making Banks PE-friendly,” in the June issue of PEI Manager magazine. The article explores what conditions will bring private equity capital back into the banking arena.
The article identifies three primary factors contributing to private equity’s general lack of interest in the banking industry: early movers like TPG have lost money; bank balance sheets are notoriously difficult to interpret; and, the accompanying regulatory burden would be significant. Bava and Miller speak to the regulatory barriers in the article, specifically the key provision that investors with a control stake in a bank or savings and loan institution need to be regulated as banks or thrift holding companies, and by virtue of such regulation must be subject to regular examination, as well as serve as a "source of strength" for the institution.
"What private equity institutions have done in order to work around those regulations, especially for those that have existing operations,” Miller says in the article, “is either form a club group where they'll make an investment side-by-side with other investors where no one investor will be in control, or put together a fund devoted exclusively to the acquisition of a bank or holding company and silo off that fund from their other funds within their network, so that the only fund that ends up being regulated is the one that is devoted exclusively to being a bank holding company.” However, recent statements from the Federal Reserve, according to Miller, “have cast a negative shadow on the use of silo funds."
Bava notes that regulators have loosened some of the control definitions to allow private equity firms to invest more without triggering a bank holding company registration requirement, by raising the maximum ownership stake that can be deemed "non-control" to 25 percent, and by allowing private equity firms one or even two seats on the bank's board of directors, so long as they agree to certain passivity commitments.
Still, the article concludes, if the government wants private capital to invest in banks, it might have to further refine these rules.
"There's so much regulation and legislation in this area that it can be a mine field for private equity to walk through, and that's something that they have to be careful of," Miller concludes.
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