Blind Pools, Split Banks And The Further Evolution Of Bank Investing

Author:Mr Thomas Vartanian, David L. Ansell, Robert H. Ledig and Gordon Miller
Profession:Fried Frank Harris Shriver & Jacobson
 
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Recently, blind pool bank investment funds have become the latest structure to attract interest among investors looking for investment opportunities in financial institutions. The NBH Holdings* transaction is the first recent example of this kind of a structure, which can be used to recapitalize or purchase open banks, or bid on failed banks from the Federal Deposit Insurance Corporation (FDIC) once a shelf charter is obtained. However, this structure comes with its own set of challenging issues for organizers and investors.

Meanwhile the Board of Governors of the Federal Reserve System (FRB) is reportedly considering the adoption of a new set of rules with regard to private equity investments and "club" deals. These rules would update those issued last September by the FRB when it increased passive investment limits to 33 1/3%. Little change in FRB policy in this area is expected as long as a new set of rules is pending.

The trend lines at this moment in terms of deal flow seem to suggest two different lines of investment strategies depending on whether the investor wants (i) an equity interest in a bank or (ii) a financial interest in the upturn of its assets. Many investors are pursuing both strategies simultaneously.

Strategy A - The Open Bank Investment This strategy includes:

Blind investment pools backing experienced bank management; Single investor non-controlling investments; Multi-investor transactions structured to avoid control by any one investor, typically preserving bank management and a traditional bank business model; and Asset purchases through joint ventures, subsidiary or other structures that allow asset investors to take an interest in bad assets or their cash flows. These structures are among those now being used to recapitalize community banks up to $5 billion in size. A more detailed discussion of structures that can be used in these types of transactions is included in our two recent books: Equity Investments and Controlling Acquisitions Involving US Financial Institutions and The Bank Holding Company Guide: New Rules of the Road for Banks and Their Investors. Strategy B - Failed Bank Acquisitions from the FDIC The availability of shelf charters from the Office of the Comptroller of the Currency and the Office of Thrift Supervision has helped private investors bridge the gap so that they can have access to FDIC-assisted sales of failed banks, but the FDIC has become less accommodating to private capital since the issuance of its...

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