Law Firm Of Pepper Hamilton LLP | Significant Private Equity and Sovereign Wealth Investments in U.S. Financial Institutions

PEPPER HAMILTON LLP
SIGNIFICANT PRIVATE EQUITY AND SOVEREIGN WEALTH INVESTMENTS IN U.S. FINANCIAL INSTITUTIONS

Date	Institution	Investor	Type of Investment	Amount of Investment	Percentage	Comments
February 2009	SouthFirst Bancshares, Inc. and its subsidiaries, including SouthFirst Bank, headquartered in Sylacauga, Alabama.	Palm Financial, Inc. (Chairman Frank Chapman)	Merger acquisition	$8.614 million in cash for the acquisition.	100%	Under the terms of this deal, Palm Financial Inc., a special purpose vehicle formed for the purpose of making an acquisition, would acquire all the outstanding common stock of SouthFirst, for $12.15 in cash per share. The transaction, which is subject to the prior approval of the Office of Thrift Supervision (OTS), is expected to be completed in the summer of 2009.
January 2009	Flagstar Bancorp, Inc.	Special purpose vehicles associated with private equity firm MatlinPatterson	Common Stock	$250 Million	70%	Prior to the infusion by MatlinPatterson, Flagstar had been approved by the Treasury to receive $266 million through the Government Capital Purchase Program. But such funding was subject to MatlinPatterson infusion. The deal is now structured as a silo-fund¹ so that David Matlin and Mark Patterson of the MatlinPatterson firm can exercise indirect control over Flagstar without subjecting their other funds and business to OTS regulation.
January 2009	Indy Mac	IMB HoldCo LLC thrift holding company controlled by IMB Management Holdings LP.	Common stock	$13.9 billion purchase price and $1.3 billion injected capital	100%	IMB will assume the first 20 percent of losses on “qualifying” loans in the portfolio, but on the next 10 percent of loan losses, the FDIC will assume 80 percent while IMB takes 20 percent. Beyond that, the FDIC will assume 95 percent of losses, while IMB assumes 5 percent. The FDIC estimates that it will incur a loss of approximately $9.4 billion in the Indy Mac deal.
September 2008 (Announced)	PacWest Bancorp	CapGen Financial	Common stock	$100 million	12%	This deal is lead by former Comptroller of the Currency Eugine Ludwig. This infusion could make PacWest strong enough to acquire deposits of failing banks. According to reports, a CapGen principal will join PacWest Bancorp’s board of directors. Additionally, CapGen will be granted preemptive rights in future equity offerings to maintain its percentage ownership.
April 2008	Washington Mutual	TPG Capital investment vehicle (TPG Investors)	Common stock, convertible preferred stock, and warrants	$2 billion	16.1%	From WaMu proxy statement seeking shareholder approval: In connection with their purchase of common stock, Series T Preferred Stock and A Warrants under the Investment Agreement, the TPG Investors and their affiliates have entered into a standstill agreement pursuant to which they have agreed not to pursue, for as long as they own at least 5 percent of the total outstanding common stock, certain activities the purpose or effect of which may be to change or influence the control of the Company without the approval of our Board of Directors. In addition, in connection with the investment the TPG Investors made certain standard “passivity” commitments to our principal regulator, the OTS
April 2008	National City Corp.	Investment vehicle managed by Corsair Capital LLC	Common stock and convertible preferred stock and warrants	$985 million²	8.8%	From Nat City proxy statement: [I]n connection with Corsair’s purchase of Preferred Stock and Warrants under the Investment Agreement, Corsair entered into a standstill agreement pursuant to which it has agreed that it and its affiliates will not pursue, for as long as they own at least 5 percent of our total outstanding common stock, certain activities the purpose or effect of which may be to change or influence the control of the Company without the approval of our Board of Directors. In addition, in connection with its investment, Corsair made certain customary commitments to the Board of Governors of the Federal Reserve System limiting its influence on the policies and management of the Company.
Spring 2008	Alliance Data Systems	Blackstone Group	Common stock	$7.8 billion	100%	This deal failed, in part, because the OCC required Blackstone to serve as a potentially unlimited “source of strength” should either of ADS’ subsidiary banks fail. Blackstone had agreed to establish a substantial reserve fund to cover any losses, however the OCC refused to remove the condition that Blackstone provide additional support as needed beyond the initial reserve.
January 2008	Citigroup	Gov’t of Singapore Investment Corporation	Convertible Preferred Securities	$6.88 billion³	4%	The Gov’t of Singapore has since converted its shares into common stock, resulting in an 11 percent stake in Citigroup. This makes Singapore the second largest single shareholder in Citigroup behind the U.S. Government.
December 2007	FC Holdings, Inc. FC Holdings is a privately-held holding company consisting of a network of community banks.	JLL Partners Fund FCH, L.P.	Stock Purchase Agreement	$75 Million	54%	The FC Holdings family of banks includes First Community Bank, The Woodlands, First Community Bank Fort Bend, First Community Bank San Antonio and First Community Bank Central Texas. JLL was approved to invest up to $150 million in FC Holdings. JLL has the first right to purchase up to an additional $75 million in common stock to provide additional cash as may be needed by FC Holdings during the next three years. This acquisition was subject to the prior approval of the Fed. The deal was structured as a silo-fund.
December 2007	UBS	Gov’t of Singapore Investment Corporation	Convertible shares	$9.75 billion	9%	UBS operates as a non-bank in the US – Utah industrial loan company; national bank limited to trust powers; and other non-bank entities.
November 2007	Citigroup	Abu Dhabi Investment Authority	Convertible shares	$7.5 billion	4.5%	Federal Reserve General Counsel Congressional testimony: “These are all passive investments that have not triggered formal review under U.S. banking law. . . . Instead, sovereign wealth funds have limited their investments to amounts that represent less than 10 percent of the voting shares of the banking organization and have designed their investments to be passive and without the connections or relationships that might allow the sovereign wealth funds to control the U.S. banking organization.”
August 2007	Spectrum Bank	Belvedere Capital Partners, LLC/Belvedere SoCal, Inc.	Common stock	$37 million	100%	In addition to the purchase price, Belvedere, a regulated bank holding company, and affiliated investors invested additional capital to support the acquisition and provide resources for local activities. Spectrum was combined with two other banks that were acquired by Belvedere.
July 2007	Doral Financial	Consortium of investors from Bear Stearns Merchant Banking	Common stock	$610 million	90%	This acquisition of 90 percent of Doral involved several investors, with each investor retaining less than 10 percent of Doral. Significant investors were required to enter into passivity commitments to assure regulators that they would not seek to assert a controlling influence over the management or policies of the bank. A silo structure was not required, because the investors were willing to accept regulatory filing obligations (under the Change in Bank Control Act). This is an example of a “club” structure, and alternative to a silo structure.
January 2007	BankFirst BankCorp, Inc.	BANKshares, Inc	Common stock	$81 million	100%	Castle Creek Capital, LLC, is the largest private equity fund in the U.S. that acquires Community banks and thrifts. A consortium of private equity groups, including Castle Creek Capital Partners III, L.P., Castle Creek Capital III LLC, Eggemeyer Capital LLC, Ruh Capital LLC, Legions IV Advisory Corp (the “P/E Funds”), which are all registered as bank holding companies, directly or indirectly acquired BANKshares, Inc, also bank holding company. After the merger, BankFirst Bank a wholly-owned subsidiary of BankFirst BankCorp, Inc. became a direct subsidiary of BANKshares, Inc. and an indirect subsidiary of the P/E Funds.
December 2005	The Private Trust Co., NA	BD Investment Holdings, Inc.	Common stock	--	100%	The OCC required a $10 million capital infusion, and required the investor to continuously serve as a source of financial strength to the target trust company. The OCC frequently points to this approval as precedent for its conditioning of an acquirer serving as a source of financial strength.

Endnotes

1 We note that an emerging approach to structuring investments in U.S. financial institutions is through silo investment structures, where an investor creates a new alternative investment fund that would invest solely in the target bank or savings and loan. Under this “silo” approach, only the fund, and any general partner or managing member that proposes to invest in the target institution would apply to become a bank holding company, savings and loan holding company, or control person. Under the “silo” structure, the other funds with an affiliated investment manager and their general partners or managing members, would not be subject to regulation as bank, or savings and loan, holding companies, or controlling shareholders, and would not be subject to the restrictions that such status carries. The OTS has approved of such funds. The Federal Reserve Board (the Fed) has approved of such a fund structure in one instance in the past, however, it is our understanding that the Fed is not receptive to consideration of further silo fund structures.

2 Nat City raised a total of $7 billion, with the remaining $6+ billion coming from other institutional investors.

3 Citi raised a total of $12.5 billion, with the balance coming from a variety of other investors including the Kuwait Investment Authority and HRH Prince Alwaleed bin Talal bin Abdulaziz Alsaud.