If the Feds can’t find big banks to buy SVB and Signature, the most likely buyers are the one group they don’t want to sell to

It used to be the go-to place for Silicon Valley. Now it’s on the block.

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But instead of an overheated auction, regulators trying to sell what’s left of Silicon Valley Bridge Bank have gotten a chilly reception so far. The FDIC held an auction of SVB last weekend and was scheduled to announce a winning bidder on March 13th. But a single buyer didn’t materialize, with big banks like that JPMorgan Chase And Bank of America seemingly Pass.

Now bids for Silicon Valley Bridge Bank and Signature Bridge Bank are due Friday, a person familiar with the situation said.

Should the FDIC fail (again) to find a white knight to buy the entire bank, it will be forced to sell it piece by piece, and that’s where private equity comes in, a group of investors that the FDIC not viewed favorably. Several alternative wealth managers including Black Stoneares u Carlyle group are interested in the $74 billion loan book and are evaluating whether to bid or not, multiple sources familiar with the sale process said. (Separately the parent company of Silicon Valley Bank, SVB Finance Groupsubmitted for Chapter 11 Protection in New York. Silicon Valley Bridge Bank is not part of the bankruptcy proceedings.)

If the private equity players are allowed to bid and are successful, the government would not consider the deal a win. Blackstone and Carlyle both started out as private equity firms, typically buying controlling stakes in companies, often using debt, and then selling them for a profit. Many of the large PE firms have gone public and diversified beyond buyout transactions into areas such as credit, real estate and infrastructure. (By comparison, Ares has always been a lender, but also invests in private equity and real estate and wealth management.) The companies, now dubbed alternative wealth managers, would buy the SVB loans at a discounted rate that wouldn’t be lost can price, said a buyout manager. “I’m surprised there wasn’t more interest [for SVB]’ said the manager.

The process is a major reversal for Silicon Valley Bank, once one of the most powerful lenders to venture startups. Founded in October 1983, SVB was nearly half of Silicon Valley’s startups. As of December 31, the company had $209 billion in assets. More than half, or 56%, of its loans went to venture and private equity firms at the end of 2022 annual report. SVB too Pioneered the use of venture debtwhich are Loans to investor-backed startups, according to the company’s website. SVB served a strategically important market, which should make the bank quite valuable, the board said. “The fact that no one is stepping up worries me that there are [SVB] Credit problems,” said the managing director.

The FDIC, with its SVB and Signature auction, would prefer to sell one bank to another bank because it takes care of deposits, say buyout executives. Regulators fear buyers who aren’t regulated as bank holding companies could use the deposits for risky purposes. (The Federal Reserve supervised and regulates all bank holding companies under the Federal Reserve Act of 1913.) This is one reason the FDIC has sought other banks to buy after past bank failures. For example, in 2008, JPMorgan Chase acquired Washington Mutual after it collapsed for $1.9 billion. JPMorgan Chase also bailed out Bear Stearns when it bought the investment bank for $10 a share 2008 at the request of the US government. Jamie Dimon, chairman and CEO of JP Morgan Chase, later said he regretted buying Bear Stearns. JPMorgan Chase is not stepping up for SVB or Signature this time. (On Thursday, several major banks, including JPMorgan Chase, to provide $30 billion in First Republic deposits to bail out lender.)

PE firms certainly have the cash to close a deal: They collectively have $1.92 trillion in dry powder, or unallocated capital, as of March, according to Preqin, a provider of data for the alternative investments industry. Private equity also has a long history of investing in financial services, including banks, but they can’t just buy huge stakes outright. The Bank Holding Company Act of 1956, which gave the Federal Reserve oversight of banks, not expressly mentioned Private equity, but states that a fund or company that owns 25% or more of a bank’s voting stock or controls is a bank holding company, according to Todd Baker, formerly head of corporate strategy and development at Drei major banks and former partner at the law firms Gibson, Dunn & Crutcher and Morrison Foerster, who teaches fintech at Columbia Law School. This means that PE firms cannot acquire more than 24.9% of a bank’s voting equity without becoming bank holding companies. If they did, it would expose the bank to onerous activity limits, capital requirements and ongoing Federal Reserve oversight, which Baker said was an “unsustainable position for PE firms.”

The Bank Holding Company Act also doesn’t allow funds to “act in concert,” Baker said. Multiple private equity firms could theoretically invest in a single bank, but each would have to cap its stakes at 24.9% or less and agree to other limitations on its influence, such as not working together, he said. “It doesn’t make sense that PE firms shouldn’t work together to achieve business success,” he said.

Also, selling SVB loans to an alternative manager such as Carlyle or Blackstone does not bode well for the future of SVB as a whole, the buyout manager said. “Someone else would buy wealth management, investment banking, fund-of-funds business, but commercial banking would be a very expensive no-credit restart,” said one venture executive.

Earlier this week, the board of SVB Financial Group set up a restructuring committee to review the matter strategic alternatives for the SVB Capital and SVB Securities businesses and other assets and investments. SVB Capital and SVB Securities are not part of the bankruptcy. Their sale has attracted “considerable interest”. it said in a statement dated March 17.

Private equity may not be the FDIC’s first choice for a buyer, but as the saying goes, sometimes beggars can’t be picky.

This story was originally featured on Fortune.com

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Source : finance.yahoo.com

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