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Blackstone, Fortress chiefs criticise FDIC proposals

Tony James and Wes Edens have each said during earnings calls this week that their firms are eager to do US bank deals, but warned proposed FDIC policies may deter investment.

The Blackstone Group has warned that tough new proposed rules governing private equity involvement in US banks could stop private equity firms from targeting the sector.

Blackstone president Hamilton “Tony” James warned that proposals by the Federal Deposit Insurance Corporation requiring private equity firms seeking to invest in banks to meet high capitalisation requirements and longer required hold periods would put private equity at a “competitive disadvantage”.

I think it will basically kill it for private equity.

Tony James

New York-based investment manager is looking hard at three banking transactions, James said, and Blackstone is “hoping the banking sector will be an active investment area for us”.

However, during a media conference call following release of Blackstone’s second quarter earnings, James added that the FDIC proposals had raised concerns. If the FDIC regulations “come to pass” as they originally set out, “I think it will basically kill it for private equity”, James said. He added, though, that the FDIC appeared to be willing to “move” slightly on the issue.

Until some of the rules regarding the investments in banks are clarified, it's difficult to commit capital given the uncertainty.

Wes Edens

The proposed FDIC guidelines call for an acquired financial institution to be “very well capitalised at a Tier 1 leverage ratio of 15 percent” and for private equity firms to provide cross guarantees, meaning if a firm owns two banks, the stronger bank would have to provide support to the weaker bank. Firms also would be barred from using the acquired bank to extend credit to their investment funds. The proposed rules are in a 30-day consultation period.

Fortress Investment Group co-founder Wes Edens also expressed concern over the FDIC rules during Fortress' second quarter earnings call. The banking sector, he said, “still has much recapitalisation and restruturing ahead”. There are “still many hundreds if not thousands” of US banks in need of capital, he said.

“Being a solution provider in this sector is something that we are very interested in and continue to work hard on, although, until some of the rules regarding the investments in banks are clarified, it's difficult to commit capital given the uncertainty,” Edens said. “Hopefully, there will be a constructive resolution of the parameters which govern investment in banks soon and this will be a significant area of activity for us in the future.”

Fortress said it has experienced “one of the best” quarters in the last two years for its private equity business. “We had excellent operating results from a number of our largest investments, in particular in senior living and our apartment company in Germany,” said investor relations head Lilly Donahue. She added Fortress has refinanced or extended maturities for the debt in a number of portfolio companies.

Blackstone, meanwhile, reported its first quarterly profit in a year, with private equity revenues rising to $198.6 million for the second quarter, compared to $68.1 million during the first three months of this year. Blackstone has $14 billion in dry powder to deploy from its private equity funds and expects to see some IPO exits from its portfolio in the next 12 months, James said. “I’m not promising a lot of exits,” he said, but interest from strategic buyers was increasing.

Amanda Janis contributed to this report.