NEW YORK ( TheStreet) -- Dealmakers are reporting an increase in the size of specialty finance deals but warn regulatory resistance remains a crimp on activity, as several large firms -- including GE Capital and Banco Santander ( SAN) -- prepare an initial public offering for their consumer finance arms. Total deal value of $38.9 billion for the year to date in the specialty finance sector is far above $11.8 billion for the prior period, according to SNL Financial. This is despite a lower number of deals this year: 120 against 128 for the prior period. Specialty finance comprises lending to a range of sectors such as airlines, shipping, technology, auto finance, credit cards and mortgage servicing rights. These companies typically serve consumers who fall outside the criteria of major banks and as such, charge higher interest rates. Macquarie Capital senior managing director head of specialty finance Eric Hanson said the thesis that banks would seek higher margins through the acquisition of specialty finance companies had not come to full fruition. "These businesses have outsized returns that banks would like to buy and while
the expectation of deal activity has been justified in some areas, it's not as much as everyone thought," he said. Bank businesses have a typical spread of 150-300 basis points while specialty finance returns range between 400-1500 basis points, depending on asset class. Hanson pointed to a gap between buyer and seller expectations, with potential buyers still unwilling to pay high prices for many businesses after a rebound in valuations following the credit crisis. Where they had, this had contributed to higher deal values, he said. "There have been potential deals in healthcare and rail finance with U.S. customers, good credit performance and $15 billion in assets -- but regulators might say to banks, 'you don't have experience doing this,' " Hanson said. He said the size of some assets made them difficult to sell, noting GE Capital had tried to sell its $50 billion credit card portfolio on and off, without success. GE Capital is now preparing to divest the business -- which earned $2.2 billion last year -- through an IPO.
Other pending IPOs include Banco Santander's U.S. consumer business that filed to raise $50 billion from a float in July. The Dallas-based unit is 65% owned by Madrid-based Banco Santander while funds overseen by Centerbridge Partners, Kohlberg Kravis Roberts, and Warburg Pincus, own 25%, and CEO Thomas Dundon owns 10%, regulatory filings show. Ally Financial is awaiting regulatory approval for its IPO, even though it still owes around $5 billion in bailout money to the government. The company -- previously General Motors Acceptance Corp., or GMAC, provides auto and commercial finance along with insurance and direct banking. In terms of pending deals, NewStar Financial ( NEWS), which has a market value of about $863 million, is reported to be working with Credit Suisse to solicit offers for its healthcare, manufacturing and energy lending business. The lender has been slated as a prime takeover target for regional banks and is backed by private equity firms, Capital Z Partners Management and Corsair Capital. Advisers point to the $2.3 billion acquisition of CapitalSource ( CE) by PacWest Bancorp this July as one which illustrates the upside of specialty finance. While CapitalSource's main subsidiary operated as a bank, Mercer Capital's Jeff Davis described it as a "commercial finance company in a bank wrapper" that was originating higher yielding assets than PacWest's traditional bank business. Both Davis and Hanson said commercial finance deals were easier to realize than consumer finance M&A, given far heavier regulation and consumer protection issues around the latter. Major banks have been limited to sector participation via portfolio sales or acquisitions given regulatory concern around creating "too big to fail" institutions. Bank of America Merrill Lynch sold its $7.14 billion portfolio of residential mortgage servicing to Nationstar Mortgage Holdings ( NSM) in January while Citigroup ( C) paid Capital One Financial ( COF) $7 billion for a credit card portfolio. -- Written by Jane Searle in New York