Carlyle Sets Its Sights on Battered Banks

Private-Equity Firms Seek New Source Of Returns Amid Slow Buyout Market

With the leveraged-buyout business on life support, major private-equity firms such as the Carlyle Group are taking a closer look at the battered banking sector as a way to make money for their clients.

Last September, District-based Carlyle invested $75 million in Boston Private Financial Holdings. Last month, it was part of a group that injected $900 million into Florida's BankUnited. Carlyle was part of a group looking to buy Atlanta-based Silverton Bank earlier this month, until regulators decided to liquidate the institution instead.

Private-equity firms have long eyed the financial services industry, but the sector took a back seat over the past two decades as private equity pursued fat returns fueled by leveraged-buyout deals. Until recently, those buyouts helped Carlyle generate an annual net return of 26 percent across the firm.

But the capital crisis that began in 2007 killed the buyout boom, forcing private-equity firms to look for other investment opportunities. At the same time, the crisis has forced many banks to look to the government -- and to private equity -- for cash.

"This economic dislocation is probably the single greatest one we have seen since the Great Depression," said Olivier Sarkozy, head of the Carlyle team looking at bank deals and half-brother of the president of France. "That, in turn, has created a supply-and-demand imbalance that we are looking to take advantage of, namely a large amount of demand for capital with limited places to turn other than private-equity houses."

Carlyle has more than $30 billion in client money sitting on the sidelines, waiting to be invested. Major private-equity players such as Wilbur Ross, Donald Marron of Lightyear Capital, and the Blackstone Group are also piling into the financial sector with their deep pockets.

"It's where fortunes are going to be made over the next two or three years," said Gary Townsend, who manages a Chevy Chase hedge fund that concentrates in the financial sector.

One thing investors like: the Federal Deposit Insurance Corp.'s willingness to share losses if some institutions fail to recover.

"It's a pretty good deal where the FDIC is going to end up limiting losses for Carlyle," said Reena Aggarwal, a professor of finance at Georgetown University's McDonough School of Business.

On the other hand, the private-equity firms take some of the burden of losses from the federal government.

Carlyle has probed 150 opportunities in the financial sector in the past two years. After delving into the financial data of dozens of banks, it passed on most. The firm dug into Boston Private's books for six weeks, including trips to California to inspect properties, before it moved on the deal.

Carlyle passed on an opportunity to invest in troubled Washington Mutual, the nation's largest savings and loan. Regulators seized the bank last fall and brokered a sale to J.P. Morgan Chase for $1.9 billion.