PE saves the day?

In late June The Carlyle Group’s Olivier Sarkozy and Randal Quarles wrote an op-ed in The Wall Street Journal urging regulators to alter restrictions that disincentivize private equity investment in ailing financial services firms. One month later, comments from representatives of the US Federal Reserve suggest that these suggestions might soon become reality.
“With more than $400 billion in available funds, private equity represents a large pool of untapped capital for the financial-services industry,” Sarkozy and Quarles wrote. “Yet an array of regulations and administrative interpretations limits private equity’s ownership and influence in regulated depository institutions.”
The two cited laws established by the Bank Holding Act that prohibit an entity that controls commercial firms from owning more than 25 percent of the voting stock of a banking company, as well as the “source of strength” doctrine that would expose the controlling entity to potentially unlimited losses.
But Fed chairman Ben Bernanke recently told the House Financial Services Committee that the Fed is examining these rules, and may clarify what constitutes a controlling interest in a bank in order to clear the way for private equity.
“Private equity is a very good source of capital,” Bernanke said at the hearing.
Treasury Secretary Henry Paulson said he also supported the idea of banks being open to private equity capital.
Robert Ohrenstein, a partner at KPMG who is responsible for the firm’s private equity transaction services division, said he welcomes the news.
“Some of the larger private equity funds would see a relaxing of restrictions as a two-fold opportunity to take advantage of undervalued banking stocks, whilst also offering a new approach to the banking business model and operating structure,” he said. “Private equity investment in the banking sector could herald a much needed injection of new ideas and source of capital – it is not a universal cure, but a fresh perspective, management style and way of operating that could be key as financial institutions look for a recovery in fortunes.”
But he warned that a shift in the Federal Reserve’s policies may not be enough to entice some investors into the sector.
“Even if the Fed progresses its ideas, many private equity companies will still tread with caution due to a historical avoidance of the sector, a shortage of individuals with the relevant core competencies, regulatory concerns and, importantly, restrictions on leverage.”