Private equity funds are playing an increasingly vital role in recapitalizing the U.S. banking industry. A unique example of this trend occurred earlier this year when four independent PE firms joined forces to make a $160 million capital investment in Birmingham, Alabama-based AloStar Bank of Commerce, a new institution which acquired the deposits and certain assets of the failed Nexity Bank from the Federal Deposit Insurance Corp.
Advised by FBR Capital Markets Corp. and the law firm Davis Polk & Wardell LLP, AloStar successfully negotiated an 80/20 loss-sharing agreement with the FDIC on $384.2 million in assets. The four PE firms are Fortress Investment Group, Oaktree Capital Management, Stone Point Capital and Pine Brook Road Partners, and each owns approximately 24.9 percent of the company.
FBR worked closely with AloStar’s founders, Chairman and CEO Michael Gillfillan, who previously was chief credit officer and vice chairman at Wells Fargo & Co., and Executive Vice President Andrew McGhee, the former head of asset-based lending at SunTrust Banks Inc. AloStar is a banker’s bank that will use consumer and commercial deposits collected nationwide largely over the Internet to fund an asset-based lending program for small- and medium-sized businesses. Recently, FBR Capital Markets Senior Managing Director Ken Slosser talked about the deal and its importance to the industry.
What are the unique aspects of this transaction?
We believe this is the first time that four private equity firms bid on a failed bank through the resolution process and won. We also believe this is the first time that the FDIC has approved a business plan for a bank receiving assistance that will use, as a primary deposit strategy, a nationwide Internet deposit gathering system to fund asset-based lending for small businesses across the country. There have been a whole host of transactions, both assisted and unassisted, where they have not allowed Internet deposits as a primary funding strategy.
Was it hard getting four private equity firms to agree on a transaction?
It was very difficult to raise capital for Nexity without government assistance because of the level of perceived losses in its loan portfolio. Once it was decided that any transaction would need to involve an FDIC receivership action, and we started working on an assisted deal with Michael Gillfillan and Andrew McGhee at AloStar, it was very straight forward to assemble the private equity group. All four firms really worked well together evaluating the opportunity, although they each evaluated the opportunity independently and their boards approved their bids.
Was there anything else about this deal that you thought was distinctive or unusual?
The regulators, including the Federal Reserve and the Alabama Banking Department, worked very closely with the old Nexity management team and the new AloStar team for months. They were unbelievably helpful in terms of evaluating and facilitating this transaction. We felt that the regulators were partners in solving a problem and they worked with both management teams to find the lowest cost solution for a troubled bank. I really believe that was critical. We also had an outstanding management team at AloStar that had the depth of experience to work through the deal and also had the expertise to implement the new business plan.
Why is this deal important to the rest of the industry?
It demonstrates that thoughtful and creative solutions involving private equity, when they are appropriately structured, will be well received and approved by the regulators. I think the private equity partners here were terrific and cooperative and very helpful. They put in $160 million and were thoughtful and constructive about how that was done.