Buyouts and Banks

Fed Hopes Buyout Firms Will Rescue Banks

The federal reserve has been actively pursuing private equity as a solution to the banking crisis. The latest and most obvious move by the Fed to attract private equity is Monday's announcement that it will loosen regulation on how much of a bank a private equity firm can own.

The previous rules restricted non-banking entities from purchasing more than 25% stake in a bank. Now, under the new loosened regulation, buyout firms can not only own as much as one third of a bank but also are allowed to have a stronger presence in the boardroom. Previously, the Fed had resisted the idea of opening up banks to outside investors but the credit crisis has forced the Federal Reserve to consider new options in private equity.

The buyout industry possesses a lot of capital and the Fed would like to see that capital invested into the struggling banking industry. The buyout industry is estimated to hold $400 billion in capital that could be invested, according to the research company Preqin. While Monday's announcement may heighten buyout firms' interest in the banking sector, it is not likely that the move will fix the banking problem according to Jaret Seiberg, a financial services analyst at the Stanford Group in Washington. In a research note he wrote that "These changes are helpful, but they do not open the floodgates to private equity investments as some investors had hoped. While this could mitigate the current crisis, we see it as unlikely." One reason that buyout firms may be skeptical about investing in the banking sector is the unsuccessful investments in banks already this year.

However, private equity firms have expressed some interest after the Federal Reserve's recent move. But buyout firms are expected to wait until the Federal Reserve and Congress reach an agreement on a bailout plan. If private equity does invest in banks, many believe it will not be in the form of big investments in major banks, but rather smaller and middle-market banks that are less subject to the volatility of the market. It is clear that the future of the financial market will in some way be determined by private equity.

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Secondary Source: CNN

Tags: Private Equity and Banks, Private Equity Credit Crisis, Private Equity and Federal Reserve, Private Equity Firms, Private Equity and Buyouts, Buyouts and Banks

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