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Private Equity Bank Acquisitions Face Hurdles

NEW YORK( TheStreet) -- There is a growing interest among both U.S. private equity and foreign banks such as Banco Santander ( STD), BBVA ( BFR) and Banco do Brasil to acquire and invest in U.S. regional and community financial institutions.

However, foreign banks are likely to make more acquisitions than private equity firms in the sector even though U.S. private equity has plenty of capital.

Interest from private equity firms to invest in and acquire banks is likely to increase as bank consolidation picks up, says Jonathan Rosenthal, a co-managing partner at Saybrook Capital, a Los Angeles-based private equity firm founded in 1990 that has made deals in the financial sector.

"There is absolutely, no question private equity is interested in getting deals done," Rosenthal says. "The opportunities will exist with smaller regional banks and some private equity investors are very focused on investing on community and regional banks."

At this moment banks are in dire need of capital. There are about 8,000 banks in the country and that number is expected to decrease significantly. There are published reports that bank closures could top 200 this year due to commercial real estate loans, and those bank failures are likely to continue for some time. The problem bank list has risen 53 banks to 829 since the first quarter of 2009.

Usually the industry would be ripe for private equity firms to jump into to make investments, especially now that some managers are under pressure to invest committed capital before the investment period ends. It's a situation where private equity firms stand to lose the money if they don't use it, says Rosenthal.

"There is a lot of dry powder out there and there are not a lot of great investment opportunities for traditional PE," says Rosenthal.

Recent private equity transactions in banking include GrandPoint Capital, which launched GrandPoint Bank in California in June 2010, through the acquisition of Santa Ana Business Bank. The bank holding company then acquired First Commerce Bank in July. Another recent deal was the $730 million investment from Warburg Pincus LLC and Thomas H. Lee partners in Sterling Financial Corp. ( STSA).

Transactions by private equity are trickling in, but would likely be greater if a number of hurdles were not holding the firms back from investing in banks.
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