October 30, 2008
Authored by: Robert Klingler
On October 28, 2008, Hovde Private Equity Advisors circulated an email specifically addressing whether institutions should seek to combine TARP Capital with private equity. For more information, or to explore the available capital partnerships, contact Joe Thomas, Managing Director of Hovde Private Equity Advisors, at JThomas@Hovde.com or 202.261.0845.
Although we have experienced unprecedented legislative and regulatory changes in the banking industry that may provide near-term systemic support, the implications for community banks remain unclear. To ensure continued success in this challenging operating environment, we believe that banks must now look to obtain the necessary mix of new capital in order to address credit losses and to also capitalize on strategic opportunities. We believe that the Treasury’s TARP Capital Purchase Program (CPP) represents a compelling source of inexpensive Tier 1 capital. Without this one-time support from the government, your institution may find itself at a strategic disadvantage amidst a severe credit cycle and radical consolidation phase in the banking industry.
If your bank is eligible to participate in the TARP CPP, then you might consider a private equity investment in 2009 in order to achieve a reduction in the proposed 15% warrant coverage on the senior preferred shares (which participating financial institutions must issue to the Treasury). If you have concerns about your institution’s eligibility, then we believe that a concurrent private equity investment could help your bank gain access to the Treasury’s CPP. Based on our recent discussions with banking regulators, we believe that those banks with CAMEL ratings of 3, 4 and 5 which are experiencing increasing levels of credit and capital deterioration, may not be approved for participation without a concurrent private equity investment.
Co-investing with private investors is a “win win” for the Treasury, as it allows the federal government to stabilize banking institutions while deploying fewer taxpayer dollars. While the cost of private equity capital exceeds the Treasury’s cost of capital, the blended cost of capital–via private equity and a government injection–is far lower than it will be if an institution applies for and does not receive Treasury support.
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