Not one to mince words, KPS Capital's Michael Psaros offers a ...

10-19_Watercooler.qxd 4/6/09 5:37 PM Page 16Water Coolerwhat players in the midmarket are talking aboutBeltwayMonitorIS TARP ALIENATING PRIVATE EQUITY? It is anotherexample of government agencies working at cross purposes:Regulatory moves designed to coax private equitymoney into the banking system are being undercut by the TreasuryDepartment’s Troubled Asset Relief Program.Certainly, some private-equity firms are not raising moneyas quickly as they once did, and others are skittish after watchingothers’ investments in banks evaporate. But sources said thegovernment itself has become an obstacle by investing some$250 billion in banks.“The reason why there haven’t been a lot of transactions announcedso far is, very simply, Tarp,” says Wilbur Ross, the billionaireinvestor and chief executive of the private-equity firm WLRoss & Co. The government has been “spraying money into alot of banking institutions and quite consistently on more generousterms than private equity would do,” he said.Mr. Ross said he talks to “a couple of banks” every day aboutmaking an investment but has yet to pull the trigger. “We’re hopefulto do [a deal] in the immediate future,” he said, “but whetherthat’s days or weeks or months, it’s hard to tell.”In November, the agency established rules to make it easierfor nonbanks to buy troubled or failed banks. With a shelf chartera nonbank can bid on failed banks before becoming a bankholding company. Before that, in September, the Federal ReserveBoard loosened a bank holding company rule to let investorstake larger stakes in banks without registering as a bankholding company. The rule also permits minority investors to havemore influence on bank boards.Though regulators do not keep track of new capital movinginto banking from the private sector, several private equity firmshave shown more interest. With that said, this interest has yet totranslate into a flood of capital moving into the sector.“There’s still money there potentially to be invested,” saidV. Gerard Comizio, a partner in Paul, Hastings, Janofsky &Walker LLP. But “the combination of the Tarp program andsome of the receivership actions [has] caused private equity to takea step back before jumping in,” he added.Brian Sterling, a principal and the co-head of investmentbanking at Sandler O’Neill & Partners LP, said among investors’biggest concerns is that if they buy a bank stake nowtheir investment could be diluted or wiped out by a governmentcash infusion later.The limitations on control over companies in which theyinvest are also giving pause to some private equity firms. A conditionof the Fed’s relaxation of its holding company requirementswas that private-equity investors own no more than 15%of a company’s votingstock.“In an environmentwhere an equityinvestor is looking tomake an investmentin a distressed bank,it’s still a non-controlinvestment,” saidJoseph J. Thomas, amanaging director atHovde Private EquityAdvisors. “You’rerestricted on the numberof board seats, andyour economic controlis capped at athird or 25% insome cases. Manyfirms look at that andWilbur Ross is among those put offby TARP red tapesay it’s very hard to make an investment in a company with thoserestrictions.”Investors can file for shelf-charter applications, but thosecome with the caveat that if an investment group gains controlof a troubled or failed bank, they would be barred from doingbusiness in other sectors.The limitation makes no sense to Ross. “We don’t mind beinga bank holding company — we don’t mind being subject toregulation,” he said. “But the idea that we couldn’t invest inanything that’s not a banking entity; that would constrict ourbusiness.”Ironically, private equity investors have a strong trackrecord when it comes to reviving banks.Ross, for instance, has seen success in Japan, after he acquiredthe troubled Kofuku Bank, while Ripplewood Holdings’investment in Shinsei Bank, formerly the Long TermCredit Bank of Japan, is credited as revolutionizing bankingin Japan. By Emily Flitter and Marissa Fajt16 MERGERS & ACQUISITIONS February 2009