Viewpoint: A Private-Equity Primer for Bank Investments

By Vartanian, Thomas P. | American Banker, November 9, 2007 | Go to article overview

Viewpoint: A Private-Equity Primer for Bank Investments


Vartanian, Thomas P., American Banker


Several recent transactions by private-equity investors, such as the HSH Nordbank deal led by the J.C. Flowers Fund and the Doral Financial Corp. deal led by Bear Stearns Merchant Banking, highlight the newly discovered interest of private investors in federally and state-regulated financial institutions.

A Viewpoint by OTS Director John Reich ["Private Equity, Welcome to the World of Thrifts," July 27, page 11] provided a guarded invitation to private-equity firms to invest in the thrift industry. But the invitation came with the admonition that private-equity firms must "understand the responsibilities attached to such investments" and "consider the regulatory requirements that apply," such as "OTS change in control requirements."

Director Reich could not have been more on target in terms of identifying the issues that private-equity firms must consider when evaluating investments or acquisitions in the financial services industry.

In the banking world, concepts of control often have little to do with the ability to exercise actual control over an institution. Control (indirect as it may be) can arise, for example, by virtue of an investment in more than 10% of a class of voting securities of a company that owns 35% of another company's voting stock, which, in turn, owns more than 25% of a bank or thrift institution's voting stock.

The four 'A's of stock ownership - "aggregation, attribution, acting in concert, and affiliation" - are critical components when evaluating the existence of control and the ways that the chain of control can be affected under federal and state law.

We have entered - whether temporarily or permanently - a new period of bank and thrift acquisitions in which deal architects will have to balance the complex federal and state rules governing what constitutes voting control of a bank, when holding company rules are triggered, and how affiliated transaction limitations may impact the deal and its equity investors.

An investment in or acquisition of some or all of the voting stock of a regulated financial institution and/or the companies that control it can be completed without triggering either control or holding company requirements, but the restrictions of the law may suggest an investment profile that does not always reflect that of the typical private-equity investor.

For example, voting control generally would have to be limited or dispersed among a number of investors to avoid a determination of control by any one investor or group of investors acting in concert. Otherwise, an investor may be considered a holding company, which would trigger investment, activity, affiliate, capital ratio, and other restrictions, as well as potential obligations to infuse additional capital that it may not be able to operate under. …

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