An investor consortium's $900 million deal for BankUnited ( BKUNA) last week represents one of the biggest private equity acquisitions of a U.S. bank, but is unlikely to be the last.

Private equity firms, including WL Ross & Co., Carlyle Group, Blackstone Group ( BX) and Centerbridge Capital Partners bought the seized Coral Gables, Fla., thrift from Federal Deposit Insurance Corp. receivership. The group beat out a reported rival bid made by a partnership of Toronto-Dominion Bank ( TD) and Goldman Sachs ( GS).

"This is a unique partnership, in that the FDIC engaged in a rather lengthy process of bidding," said John Kanas, the former North Fork Bank CEO who will run the new BankUnited for the investor group. "Quite a number of people were looking at this company and doing due diligence. It's obvious that the selection of our group by FDIC represented the least costly resolution to U.S. taxpayers."

The deal ranks as the third largest private equity acquisition of a savings and loan institution since the start of the economic crisis last year, according to data from Dealogic. A consortium of private equity firms including J.C. Flowers & Co. in January acquired most of IndyMac Bank FSB's assets for $13.9 billion. The much larger Washington Mutual was scooped up by JPMorgan Chase ( JPM), after it was seized by regulators in October. Both deals received generous loss-sharing provisions or loss protection from the FDIC.

But those deals occurred last year, in the heat of the crisis, when it was unclear how bad the situation would get, and the FDIC was eager to resolve the IndyMac and WaMu situations. The result of the BankUnited auction may provide a better glimpse of what lies ahead for private equity names chomping at the bit for distressed-bank takeover opportunities.

"These funds all recognize there is a potential gain here and they have the capital," says Lawrence Kaplan, former senior lawyer at the OTS and who now practices in the banking and financial institutions group at the law firm Paul Hastings. "We are now sitting here with an interesting challenge: These banks need capital and these funds have the capital. And the regulators are challenged in thinking, "How do we marry the two?'"

Private equity firms face several challenges in taking over banks. Not least of those is the government's reluctance to hand over banks to firms that are known for targeting big payoffs laced with leverage, rather than the prudent lending and sustainable, moderate growth bank regulators are charged with fostering.

But private equity firms must also be able to price entities whose troubles stem from assets that are difficult to value. They have to place bank assets into a "silo" fund that is kept entirely separate from other investments, and they may have to disclose sensitive information about fund investors and operations.

They must also have a business plan in place for the next few years, and a management team capable of carrying out that plan. And because of rules limiting the ownership stake one firm can have, several PE funds must be involved for an outright takeover -- providing ample ground for clashes over culture and management ideas.

"It's hard enough to do a deal with a club of two, much less a club of five," says Joshua Siegel, managing principal of the private equity firm StoneCastle Partners, which is actively engaged in negotiations.

Still, with hundreds of bank failures expected to occur before the end of next year, many firms smell profit in the rubble. Those who participated in the IndyMac deal, including bank-takeover veteran J. Christopher Flowers , have not been shy about touting its prosperity. And many remember handsome rewards of the last banking calamity -- the collapse of hundreds of savings & loan institutions during the 1980s and 1990s -- when investors snapped up assets from the Resolution Trust Corp. at steep discounts, only to see profits surge.

Last week, the Office of Thrift Supervision's approved MatlinPatterson Global Advisors' intended acquisition of Flagstar Bancorp ( FBC). Flagstar is a regional bank in Troy, Mich., which is struggling under escalating losses. While Flagstar holds $16.8 billion in assets -- $6.2 billion in retail deposits alone -- its market cap was just over $125 million on Monday, trading around $1.40 per share. A year ago the stock was more than three times higher, and two years ago more than 10 times higher.

Siegel, whose firm has invested $2.3 billion in over 200 banks over the past several years, says deals are attractive today because banks have not been at current discounts for about 25 years. However, he predicts that just a small portion of failed banks will fall into the hands of private equity. He calls banking the "biggest exclusive club in America," because of the difficulties involved in acquiring and operating one.

"It is still very difficult to consummate a deal, not because regulators are being difficult, but because the rules are difficult," says Siegel. "Regulators turn down potential large investors with frequency -- whether it's their personal character, their background, their business plan. Just because you have the money doesn't mean the regulators will allow you to buy the bank."

According to those who have participated in negotiations, regulators are seeking specific details of the investor base, managing partners and PE firm's history, in part to avoid any proverbial egg on the face. Kaplan notes the instance of the financial firm Bank of Credit and Commerce International, which ran a huge scam in the 1980s to deceive auditors, investors and depositors alike, but had slipped under the regulatory radar.

"No one wants to be hauled before a congressional committee and say, 'How did you not know about this?'" says Kaplan. "If you have Osama bin Laden as your investor, I don't want to be the regulator who has to answer to that."

As a result, the approval process can be long and arduous. Complex rules and an assortment of regulators with sometimes differing objectives and opinions have stymied recent efforts to get deals done. Besides the FDIC, there's also the Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Treasury Department and state officials. Not every bank falls under one or all of those agencies.

By contrast, private equity firms are accustomed to highly leveraged deals that entail little regulatory oversight, but offer huge returns for big investors.

"It's a very byzantine process, and when you try to explain this to private equity people, a lot of them just throw their hands up," says Walter Mix, a former bank regulator who is advising private equity firms on such deals as a managing director at the consulting group LECG.

While some say attractive valuations will continue to drive PE firms toward bank acquisitions, others contend that potential rewards are not so great, on a relative, risk-adjusted basis. For instance, San Diego State University finance professor Nikhil Varaiya estimates that bank deals today offer a return on equity of 15% to 20%. A typical private equity return target in recent years has been more than twice that percentage.

"Is that something they can live with, given that historically when they have done well, they have done tremendously well in a short period of time?" asks Varaiya.

Furthermore, many private equity funds are set up to have a profitable exit strategy within five years or less. If the recession drags on for several years and profitability is hindered, acquisitions that seemed like bargains may turn out to be busts.

Several recent bets that soured have made PE firms even more wary about their investments. Flowers has seen major investments plummet in Hypo Real Estate Holding AG and Japanese banks. Chrysler's potential bankruptcy poses huge risk to Cerberus. Texas Pacific Group lost $1.35 billion on its $7 billion investment in WaMu last year.

"Nobody else wants to see that happen," says Mix. "They want to have clarity before they pull the trigger."

Given the headwinds facing PE players, on the regulatory end as well as the valuation end, Mix says that most are sitting on the sidelines, acquiring very small banks to register for approval as a bank holding company. Flowers did this by purchasing First National Bank last year, and Wilbur Ross, the king of distressed investments who heads WL Ross, did this by taking over First Bank and Trust Co. earlier this year.

If opportunities emerge down the line, great. If not, PE firms will seek other avenues with fewer complications and less regulatory scrutiny.

Says Kaplan: "Private equity is very private."

Philip van Doorn contributed to this report.

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