A few private equity firms stepped in during the financial crisis and recapitalized struggling banks, but what is private equity doing now that bank stock prices have largely improved? Some private equity firms already have exited their investments, making hefty returns by doing so. Bank Director magazine talked to investment bank Hovde Group’s Joe Fenech and Kevin Fitzsimmons, both managing directors in the equity research department, about recent research the two conducted on private equity ownership of banks and the potential for future M&A activity.
You’ve done some research on private equity ownership in banking companies. What did you find?
Joe: Private equity firms were obviously a sorely needed source of capital for smaller banks during the downturn, and the track record for private equity would seem to suggest that these firms will remain involved for up to five to seven years at most. And, with most of these investments having been made roughly three to five years ago, we think the exiting process for private equity could result in a sale of the company or some other event that is likely to have a meaningful impact on the stock.
What are the possible outcomes for banks with private equity ownership?
Joe: We cite three examples that illustrate the different paths that these PE firms may elect to take to exit their position. First, Sterling Financial Corp. was a classic, textbook-type PE opportunity. PE invested at $13 per share in 2010, they oversaw the cleansing of the balance sheet, and the company was then sold to Umpqua Holdings Corp. earlier this year for $33 per share. Second, in the case of BankUnited Inc., the PE firms partnered up with a highly respected management team, invested at $10 per share in May 2009, and following an early 2011 IPO at $27 per share, opted to divest its stake gradually, and was completely out of the shares by late 2013.
Kevin: And third, in the merger between Yadkin Financial Corp. and VantageSouth Bancshares Inc., we saw PE holders opting to remain with the company through the merger. This could suggest an extended investment time frame or maybe that the PE firms see considerable value still to be realized.
Haven’t there been private equity investments that didn’t do well?
Kevin: In one example, CommunityOne Bancorp has two main private equity backers that have a cost basis of $16 per share, and today the shares trade at about $11 per share [as of mid-November 2014], so it most definitely is underwater as of today. That said, management would emphasize that this was a longer-term project and that private equity was very aware of that from the start.
What do you predict will happen to banks that have private equity ownership in the next year or two?
Joe: A lot of these stocks are at or near post-crisis highs and some of the PE positions are sitting at substantial gains. At the same time, regulators appear to be softening their stance on M&A, particularly for mid-cap acquirers. If we’re right, and the pace of M&A continues to accelerate, it only furthers the notion that we’ll probably see resolution of several of these PE investments over the next couple of years.
Which banks have the highest potential to sell?
Kevin: One example is Palmetto Bancshares Inc., although we should note that the possibility of a sale is just one of the reasons we’re positive on the name. PLMT has a very attractive franchise and management has done an impressive job overhauling the company, and we think it’s possible that private equity could be open to an exit via M&A.
Joe: Stonegate Bank in Florida is another one, although not tied to PE involvement. We think Florida as a whole will have a pickup in volume of M&A deals and pricing given its increasing return to health. South Florida, in particular, is on fire.
What does the future hold for more private equity investments?
Joe: Private equity firms tend to make most of their investments during times of acute stress, so with the stocks nearing post-crisis highs, we think the question is more about how private equity looks to exit these stakes, as opposed to making new investments.