Banks, Look Both Ways: Are you Ready for Private Equity?
When we re-open our offices next week, I'm going to put a motion in front of our team to designate 2011 as the "Year of the CEO's iPad." From our Acquire or Be Acquired conference last January --where maybe 15% of the audience were geeked out -- through our most recent Boardroom Forum on Lending -- with iPads and iPhones dueling for space in front of attendees -- CEOs, Chairmen and members of the boards of banks must have driven Apple's impressive sales numbers. For a so-called tech-wary bunch, I saw a whole heckuva lot of Apples at our events. Where laptops dominated the conference scene in 2010, 2011 wraps up with tablets galore.
This change in how our attendees consume and share information mirrors the quick changes that banks are facing with their customer base. For example, ever-less-loyal, mobilely-enabled customers are going online in droves to shop for the most favorable rates, highest returns and superior mobile banking experiences. This is putting additional stress on bank executives and their boards already under considerable pressures to grow a franchise, increase profitability and raise capital.
Against this bleak backdrop, private equity firms like TPG Capital, Sequoia Capital and General Atlantic have made their mark as banks seek capital for growth. With relatively few in a position to successfully tapping the equity markets, let me offer up a story from our 3rd quarter issue that looks at private equity’s elevated interest in the financial community (is it good news for banks?). The hook to 2012: private equity funds might play an increasingly important role in re-capitalizing the U.S. banking industry:
On the surface, it seems like a no-brainer: banks need capital to bolster loss-battered balance sheets, meet stiffer regulatory capital requirements or... take advantage of expansion opportunities.
Regardless of its motivations, PE has been there when more traditional forms have been absent. “The industry needs capital anyway it can get it,” says Ralph “Chip” McDonald III, a securities law partner at Jones Day in Atlanta. “For many banks—especially those that lack an active public following—private equity is often the best, if not only, solution.”
Beyond the money, PE firms often bring a little something extra to the party: Merger-and-acquisition prowess, mortgage servicing efficiencies or simply the wisdom of experienced bankers who have been through previous tough cycles or hold other investments, and understand what it takes to succeed.
However, the field of private equity funds focusing on banks has shrunk, creating a more competitive landscape. While private equity industry leaders have a brighter outlook for their year ahead (according to KPMG’s 2011 Private Equity Executive Survey), few have the same sunny optimism for the financial community. Financial institutions are getting hit with increased regulatory costs and rules that lower fee income -- at a time when interest rates are already low. Banks must keep higher levels of capital and better quality capital on their books in the midst of a low-growth environment, while earning less in fees for everything from debit cards to overdraft. Not exactly the recipe for attracting new investment.
Looking ahead, the pressure to raise capital will become even more intense and consolidation throughout the industry will happen (when merits its own column). To be sure, banks with proven business models and established brands will find fresh capital -- albeit at depressed prices. So what PE firms are willing to take a chance on banks -- and when they do, what do they want in return? Questions I expect we will discuss and address rather regularly in the new year.
