Private Equity Gets a Banking Education: Why the Expected Flood of Private Capital into Banking Has Been Only a Trickle, and Other Broad Trends Heading into the New Year
Cocheo, Steve, Streeter, Bill, ABA Banking Journal
A Year or so back, in the wake of a liberalization of Federal Reserve policy, many expected to see an influx of private equity coming into banking, including community banks. Conferences and seminars held out great promise of fresh capital, legal advisors boosted the concept in client letters. While there have been some notable forays into larger institutions, community banks for the most part haven't seen the private equity that some hoped for.
David Sandler, principal in the financial institution investment banking firm of Sandier O'Neill & Partners, L.P. (photo opposite page) addressed this issue and others in a speech at ABA's National Agricultural Bankers Conference in November and in a follow-up interview conducted in late December.
Initially, he says, private equity interests came into banking under educated about the banking system. They had the attitude that they could buy banks on the cheap from FDIC, build them up a bit, and then turn them around at a neat profit.
"It doesn't strengthen the system to get that kind of capital to the table," says Sandler, who works out of the firm's San Francisco office, and FDIC, as gatekeeper of who acquires failed or failing banks, has exercised some control.
"Of course every dollar of new capital improves the system," says Sandler, "but you are dealing with operating entities, not just assets, and to be operated well you need to employ good management."
There has been some evolution among members of the private equity community, says Sandler. "We are now left with the more educated players at the table," he says, "those with a more thoughtful approach to management, the industry, and regulations."
Given all that, is banking still an attractive investment to the private equity groups? "It depends," says Sandler. "The pricing hasn't ever been much better than it is now, but you still have to execute. Also, we don't know how bad CRE will get, or how the consumer will hold up going forward."
In his speech, Sandler cited an example of a different bank investment play, one where investors are brought into the business with the intent of staying for long-term " improvement and gain. The example he cited was John Kanas, the former chief executive of North Fork Bank, now Capital One.
Kanas has come out of retirement to build up a Florida-based banking machine, with long-term development in mind. This began with the acquisition of failed BankUnited FSB, Coral Gables. Sandler says Kanas invited Florida institutions to talk about getting involved with his organization and investors. His plan is to fix up acquired institutions, and bring increased efficiencies to the combined entities.
Indeed, increased efficiency is one of two strategies that Sandler predicts would help pull community banks back to success in the period ahead.
"A phrase we're going to be hearing more about is 'right-sized'," says Sandler. In some cases, "right-sizing" is going to mean merging with community banks in neighboring counties in order to spread out costs. He acknowledges that some banks with $200 million in assets or less can be efficient, but for most there are fixed costs that require a certain asset size to cover efficiently. There is no ideal size, however. In fact, Sandler believes banks in the $20-$30 billion range have a tough time competing with low-cost, trillion-asset providers.
The other strategy that will see growing usage is core-relationship banking. All banks are increasingly stressing broader and deeper relationships with existing customers. Community banks, says Sandler, have a natural advantage here because of their long-time reliance on relationship banking.
Looking at industry hot buttons
In the course of his keynote presentation and follow-up interview, Sandler touched on major issues and trends of the day. …