Wilbur Ross & Sovereign Wealth, Heading For Banks

It was almost amazing that private equity funds never did go acquire many banks, despite the lending woes that came to pass.  For some time there was value there before the logic and rationale behind credit evaluations were tossed out the window.  We had discussed this with many groups last year and the answer was always that the private equity firms were sitting out to avoid the relative valuation erosion as peer-pressure drove down the value of the solid companies.

Wilbur Ross may soon be making a change to this approach of avoiding the group.  Last week there many reports out of Reuters, Crains, and others discussing Ross’s intent to go after depository institutions.

Bloomberg ran an interesting article on this today with more finite plans and more finite terms.  This noted that he plans to seek about $4 Billion from investors that include sovereign wealth funds that would be earmarked to acquire U.S. depository banks.

This article today notes that Ross intends to package banks that can be invested into.  If this comes to pass, it’s essentially a billionaire’s regional and community bank fund.  What is even more interesting is that this would allow sovereign wealth funds to get a back door into investing in financial institutions that they’d otherwise be under CFIUS or local media and regulatory pressure to stay out of.   

We screened and then evaluated many mid-sized and smaller banks in 2007 with market caps in the $400 million to $2 Billion for our own special situation investing newsletter.  We looked for those institutions that were either in geographically recession-resistant markets or that hadn’t exposed their books and shareholders to the lunacy of leverage in financial instruments that sound more like science fiction that they do financial instruments. 

We actually found many that were rather attractive, but there was little point in getting in front of a melting freight train.  many also do not have the proper stock option hedging instruments that can be traded or that are liquid enough for those to qualify for our special situations letter.  But there are many that did fit the bill and with the financial crisis being at least partly lightening up, it looks like its time to dust off that list.

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Jon C. Ogg
April 16, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at [email protected] and he does not own securities in the companies he covers.