THE BASIS POINT

Private Equity Limits on Bank Investing To Be Lifted?

Yesterday during testimony to the House Financial Services Committee on Financial Regulation, Treasury Secretary Henry Paulson said there is a forthcoming plan to allow private equity firms and hedge funds to invest in banks. Right now, private investors cannot accumulate more than a 9.9% stake in banks without bumping into regulations, but this could rise as high as 24.9%. According to Pensions & Investments:

If the Fed allows private equity firms and hedge funds — using asset pools set aside for longer duration investments known as “side pockets” — to take larger stakes in banks, the number of private equity-backed financial services transactions alone could double to about 15% of the U.S. stock-market capitalization, said Monte Brem, chief executive officer at Stepstone Group LLC, a La Jolla, Calif., alternative investment consulting firm.

According to P&I, the proposed regulatory changes are good for private investors for 2 reasons: (1) they come at a time when banks are severely distressed so any outside investments would be great for returns for any investors on a forward looking basis, and (2) banks capital requirements are being raised so they need sources of outside capital. Private equity firms are definitely getting ready for the proposed changes:

TPG is reportedly aiming at raising a $6 billion fund, TPG Financial Partners, to take minority stakes in large financial services firms. Specialist financial services firms raising funds include Pine Brook Road Partners LLC, raising $2 billion; DLB Capital LLC, $1.5 billion; Dubai Islamic Bank, $1 billion; and Equifin Capital Partners, $500 million fund. Stone Point Capital LLC closed on its $2.25 billion Trident IV fund last year.