FDIC should pave way for PE, RE-led bank recapitalisations

Private equity and private equity real estate firms should be encouraged to mount bank recapitalisation JVs, mirroring FDIC-initiated structured sales of failed financial institutions.

The US Federal Deposit Insurance Corporation has been urged to “make life easier” for private equity real estate investors wanting to team up with private equity firms to recapitalise struggling regional and community banks.

With rising competition – and prices – for failed bank asset sales, many real estate investors are exploring alternative ways of accessing the troubled mortgages held on many US banks’ books.

One option is to team up with private equity platforms to recapitalise banking entities that are struggling, but have yet to fail, allowing private equity real estate firms to lead loan workout strategies and possible sale of assets.

There ought to be recognition that there are pools of capital out there and that they should be invited to the party.

Hal Reichwald, co-chair of law firm Manatt, Phelps & Phillips’ banking and specialty finance practice group

However, according to Hal Reichwald, co-chair of law firm Manatt, Phelps & Phillips’ banking and specialty finance practice group, the banking regulator, which takes over and liquidates failed banks, is reluctant to “invite” private equity and private equity real estate to make investments in financial institutions because of the short-term nature of the capital.

“The fear is that this will be hot money, which doesn’t have the sticking power that regulators want to see,” Reichwald told PERE. The FDIC was currently split on whether to ease rules governing private equity investments in the banking sector, Reichwald said, but added: “There ought to be recognition that there are pools of capital out there and that they should be invited to the party.”

By allowing private equity real estate to launch recapitalisation JVs, the FDIC could also start dealing with banks that were struggling, but had not yet failed – dubbed the “walking wounded” – rather than just those institutions that had folded.

The deals could also mirror the FDIC’s own structured asset sales of failed banks, whereby the bank – rather than the FDIC – shares in the upside of workout or sale of its real estate portfolio alongside the private investors.

The FDIC is only dealing with those institutions that have failed. It also needs to pay attention to the struggling institutions. The FDIC needs to be more open to a variety of schemes so that banks are never given to failure in the first place.

Reichwal

In February, Rialto Capital Management – part of homebuilder Lennar Corporation – acquired 5,500 sub and non-performing residential and commercial loans, pooled from 22 failed banks and with a face value of more than $3 billion, for $243 million. Rialto took a 40 percent stake in a new company that will hold and manage the loans, while the FDIC retained a 60 percent interest.

“What you are looking at are private FDIC-style deals,” said Manatt, Phelps & Phillips’ partner Masood Sohaili. “Many banks cannot raise capital in the market but they are not sick enough to be taken over by the FDIC. By negotiating a deal with private equity and private equity real estate, you can get the recapitalisation needed, you get the real estate expertise to deal with the troubled assets and all sides can split the upside.”

Reichwald said the FDIC should be credited for not employing the same “dump and run” strategy seen during the RTC era.

“This is more measured and transparent,” he said. “But at the end of the day, the FDIC is only dealing with those institutions that have failed. It also needs to pay attention to the struggling institutions. The FDIC needs to be more open to a variety of schemes so that banks are never given to failure in the first place.”