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Warburg Pincus Private Equity X, which owns just under 10% of Webster Financial, will sell its entire position in a secondary offering.
May 8 -
BankUnited looked like a seller last year, but a secondary offering of nearly 20 million shares will let PE profit and should arm BankUnited with a more valuable currency for buying banks.
March 6 -
Private equity firms could unload their bank investments if a weak economy and sluggish earnings persist.
December 31 -
Warburg Pincus, which has invested in three banks, employed a different strategy than many of its rivals that bought into financial institutions, managing director Daniel Zilberman explains. And it has the strategy for its next round of deals ready to go.
February 21 -
The future is bright for mortgage servicers, but his PE firm agreed to sell Homeward Residential to Ocwen because it had held the investment long enough — and owning stock in a bigger servicer will pay off, billionaire Wilbur Ross said.
October 3
Private equity is trying to time its exit from banking as skillfully as it made its arrival.
Hedge funds, PE groups and other investment vehicles descended on the weak financial sector in 2009 and 2010, bearing buckets of capital to rescue the banks worth saving. And they entered those institutions at bargain prices.
Given the bullish stock market and lukewarm outlook for banks, the time to exit might be now.
Take Warburg Pincus, which this month cashed out its investment in Webster Financial (WBS) in Waterbury, Conn.
The combined payday of nearly $400 million more than doubled its investments.
It initially put $115 million in Webster, paying $10 per share in 2009. In late 2010 it invested an additional $37 million, at $18 a share, greasing Webster's exit from the Troubled Asset Relief Program.
Warburg and Webster declined to comment for this story, but observers speculate that Warburg figured the value of its investment was near its peak given the revenue pressure banks face from low interest rates and low loan demand.
"I don't think they expect to make the same kinds of returns in Webster in the next two or three years as they did in the last two or three years," says Matthew Kelley, an analyst at Sterne Agee. "The easy money was made by entering Webster when it was under intense stress."
Collyn Gilbert, an analyst at KBW, agreed. She said she is struggling to see where "meaningful returns are going to come from in the future." With the credit recovery story over at Webster, it now likely needs to streamline its branch network, she said in a research note this month.
Considering Webster's fundamental challenges of tight margins and limited loan growth, the stock's current fair value is $24 a share, she wrote. Its shares closed Wednesday at $23.33, meaning there is not much more upside.
"Private equity expects high returns and what could drive the same kinds of returns over the next few years?" Gilbert says. "I just have no idea."
Kelley says the current bullish stock market, pitted against the uncertain revenue picture, could drive other private-equity investors to cash out.
"I would anticipate additional actions; the investor demand for the community and regional banks is improving by the day," Kelley says.
The exits have materialized in a few ways recently.
There are other reasons to exit beside the stock market. The covenants of some agreements set time limits, meaning some investors have to cash out by a certain date. Also, as billionaire Wilbur Ross pointed out last year,
Also, observers cautioned that investments have different rationales and time horizons. For instance, Warburg
"With Nat Penn, you have a much higher likelihood to create something larger," Kelley says. "With Webster, they had made so much money, and it was time to hit the road."
A private-equity divestiture is a sign that a sale of the whole company is unlikely.
"If the bank was going to sell, private equity wouldn't have exited," says Mark Fitzgibbon, an analyst at Sandler O'Neill. "A PE divestiture is not a bullish signal to the other investors."
To be sure, not every private-equity firm has made out handsomely. Some are still hoping for the kinds of returns Warburg realized from Webster. Many underestimated the level of resistance to their plans offered by regulators.
"The recovery has been slower than anticipated, and it is still a pretty tough environment," says Stephen Klein, a partner at Graham & Dunn in Seattle. "And a lot of them want out because they are not used to dealing with regulators."
