The Federal Reserve has moved to ease bank ownership thresholds, allowing private equity firms to acquire larger-sized stakes in banking companies along with board representation.
Under the Feds new guidelines issued late Monday, a private equity investor may acquire 33% of a bank's stock, including 15% of its voting shares, as well secure board representation.
Moreover, the new minority-stake investments made by private equity firms would not trigger additional regulatory oversight as they would have done previously under the Bank Holding Company Act.
As the regulator disclosed, the act was designed from preventing commercial firms from exerting a controlling influence over a banking organization.
"What the Fed has done is address the disconnect between what the rules permitted previously and how these investors approach their portfolio management," says David Nissenbaum, a partner at Schulte Roth & Zabel.
The Board has reexamined its precedent in this area and, based on its experience with minority investors and director representation, believes that a minority investor generally should be able to have a single representative on the board of directors of a banking organization without acquiring a controlling influence over the management or policies of the banking organization, the Fed said in its policy statement on equity investments in banks.
The move is significant for a number of reasons. The Fed hasnt previously permitted an investment firm that acquires between 10% to 24.9% of a banks voting shares to have a seat on a banks board, which typically seat nine to 10 directors. For private equity firms that seek influence over a companys direction, the lack of board representation has often been a major sticking point.
However, the Fed said that it would be difficult for a minority investor holding one board seat "to have a controlling influence" over management or policies of a banking company.
The new development may spur more investment in community banks that need to shore up loan loss provisions and capital reserves, especially those with exposure to mortgage-related debt. Even prior to the new Fed guidelines, which had been sought by some of the biggest-name financial sponsor firms in the private equity industry like The Carlyle Group, some investment groups have committed capital to publicly-traded regional banking franchises.
Earlier this month, CapGen Financial Group, a New York private equity firm established by former US Comptroller of the Currency Eugene Ludwig, invested $100 million for a 12% stake via a private placement in San Diego community bank company PacWest Bancorp. PacWest is a portfolio company of private equity bank holding company investor Castle Creek Capital.
The deal followed a similar investment in August when Chicago investment firm CIVC Partners invested $50 million in Wintrust Financial, a $587.3 million market-capitalized company that operates community banks in the Chicago and Milwaukee areas.