Recently, blind pool bank investment funds have become the latest structure to attract interest among investors looking for investment opportunities in financial institutions. The NBH Holdings* transaction is the first recent example of this kind of a structure, which can be used to recapitalize or purchase open banks, or bid on failed banks from the Federal Deposit Insurance Corporation (FDIC) once a shelf charter is obtained. However, this structure comes with its own set of challenging issues for organizers and investors.

Meanwhile the Board of Governors of the Federal Reserve System (FRB) is reportedly considering the adoption of a new set of rules with regard to private equity investments and "club" deals. These rules would update those issued last September by the FRB when it increased passive investment limits to 33 1/3%. Little change in FRB policy in this area is expected as long as a new set of rules is pending.

The trend lines at this moment in terms of deal flow seem to suggest two different lines of investment strategies depending on whether the investor wants (i) an equity interest in a bank or (ii) a financial interest in the upturn of its assets. Many investors are pursuing both strategies simultaneously.

Strategy A - The Open Bank Investment

This strategy includes:

  • Blind investment pools backing experienced bank management;
  • Single investor non-controlling investments;
  • Multi-investor transactions structured to avoid control by any one investor, typically preserving bank management and a traditional bank business model; and
  • Asset purchases through joint ventures, subsidiary or other structures that allow asset investors to take an interest in bad assets or their cash flows.

These structures are among those now being used to recapitalize community banks up to $5 billion in size. A more detailed discussion of structures that can be used in these types of transactions is included in our two recent books: Equity Investments and Controlling Acquisitions Involving US Financial Institutions and The Bank Holding Company Guide: New Rules of the Road for Banks and Their Investors.

Strategy B - Failed Bank Acquisitions from the FDIC

The availability of shelf charters from the Office of the Comptroller of the Currency and the Office of Thrift Supervision has helped private investors bridge the gap so that they can have access to FDIC-assisted sales of failed banks, but the FDIC has become less accommodating to private capital since the issuance of its August 26, 2009, Policy Statement on Qualifications for Failed Bank Acquisitions and its adoption of new guidance on Enhanced Supervision Procedures for Newly insured FDIC-Supervised Depository Institutions issued just two days later on August 28, 2009. The jury is out on how private equity will participate in assisted bank deals in the future given the application of the many requirements and restrictions set forth in these two documents. That is likely to be a function of the financial needs of the FDIC going forward.

In the face of deteriorating economic conditions, the traditional methods of the FDIC to resolve failed banks have been evolving as they did nearly 20 years ago in the savings and loan crisis. Since the IndyMac* and BankUnited* transactions, which involved acquisitions of the deposit franchise as well as the assets of the failed bank with loss sharing from the FDIC, the FDIC is now primarily pursuing several different resolution strategies:

  • Loss sharing transactions with strategic buyers, which take the deposits and some or all of the assets;
  • Loss sharing transactions with joint ventures between strategic buyers and private equity investors;
  • Transactions with private equity investors that have a shelf charter and can tolerate the restrictions established by the FDIC's recent statements and guidance; and
  • "Split bank" or "good bank/bad bank" transactions in which a strategic buyer acquires the deposit franchise and a non-bank investor or investor group acquires the assets through the private placement by the FDIC of an interest in an limited liability company in which the FDIC is the majority or a significant investor (e.g., the Corus/Starwood* transaction with a group of private investors announced on October 6, 2009).

The options under Strategy A and Strategy B have regulatory, financial and operating implications of their own. Please continue to bring us any questions that you may have so that we can assist you in making the right business decisions in this evolving area.

* Fried, Frank, Harris, Shriver & Jacobson LLP represented parties involved in these transactions.

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