It is another example of government agencies working at cross purposes: Regulatory moves designed to coax private-equity money into the banking system are being undercut by the Treasury Department's Troubled Asset Relief Program.
Certainly, some private-equity firms are not raising money as quickly as they once did, and others are skittish after watching others' investments in banks evaporate. But sources said the government itself has become an obstacle by investing some $250 billion in banks.
"The reason why there haven't been a lot of transactions announced so far is, very simply, Tarp," said Wilbur Ross, the billionaire investor and chief executive of the private-equity firm WL Ross & Co. The government has been "spraying money into a lot of banking institutions and quite consistently on more generous terms than private equity would do," he said.
Mr. Ross said he talks to "a couple of banks" every day about making an investment but has yet to pull the trigger. "We're hopeful to do [a deal] in the immediate future," he said, "but whether that's days or weeks or months it's hard to tell."
Until it becomes clearer which banks will be allowed to fail and how much the government will assist in sharing losses, said Carla Brooks, a managing director at Commerce Street Capital LLC, investors would be wise to stay on the sidelines.
"If I had my fund ready to go, I still wouldn't jump in until some time next year," she said. "Investors are just trying to be smart about where they put their money. There is going to be a ton of good deals coming along."
Ms. Brooks' firm recently helped an investor group get the first "shelf charter" from the Office of the Comptroller of the Currency. In November, the agency established rules to make it easier for nonbanks to buy troubled or failed banks. With a shelf charter a nonbank can bid on failed banks before becoming a bank holding company.
Even before that, in September, the Federal Reserve Board loosened a bank holding company rule to let investors take larger stakes in banks without registering as a bank holding company. The rule also permits minority investors to have more influence on bank boards.
Though regulators do not keep track of new capital moving into banking from the private sector, several private-equity firms have shown more interest.
Shivan Govindan, the president of the New York private-equity firm Resource Financial Institutions Group Inc., said investors who had been uninterested in banks now have their sights set on the industry.
Private-equity investor Josiah Hornblower is looking to raise about $100 million to invest in banks with $100 million to $2 billion of assets. His Blue Pine Financial Opportunities Fund LP has no interest in buying a bank outright, he said, but does expect to take larger stakes than would have been allowed before the Fed's September move.
"I want to stay a minority and not deal with the burdens of regulators," he said. "Now we can go up to 33% and build influential stakes in companies."
Still, raising capital can be tricky. Dory Wiley, the president of Commerce Street Capital, said institutional investors have interest in his funds but that they have been slow to come up with cash as they deal with losses on other investments.
But after the New Year and portfolio allocations are redone, Mr. Wiley said, he expects money to be freed up. He said Commerce was planning to close on a $50 million capital raising this week. he expects it to close on another $150 million in the first quarter.
Mindful of losses taken by some large private-equity firms this year, those with money to invest now are being extra cautious.
TPG Inc. invested $7 billion in Washington Mutual Inc. this spring, believing the beleaguered thrift could recover from massive loan losses, but it was burned when Wamu went bust. Corsair Capital took a loss on its $7 billion investment in National City Corp., which is being sold to PNC Financial Services Group Inc.
"There's still money there potentially to be invested," said V. Gerard Comizio, a partner in Paul, Hastings, Janofsky & Walker LLP. But "the combination of the Tarp program and some of the receivership actions [has] caused private equity to take a step back before jumping in," he added.
Brian Sterling, a principal and the co-head of investment banking at Sandler O'Neill & Partners LP, said among investors' biggest concerns is that if they buy a bank stake now their investment could be diluted or wiped out by a government cash infusion later.
"The issue for private-equity investors … is getting a handle on the credit exposure at the companies they're looking at to determine how much capital is necessary and whether they can get an attractive return on their investment," he said.
The limitations on control over companies in which they invest are giving pause to some private-equity firms. A condition of the Fed's relaxation of its holding company requirements was that private-equity investors own no more than 15% of a company's voting stock.
"In an environment where an equity investor is looking to make an investment in a distressed bank, it's still a noncontrol investment," said Joseph J. Thomas, a managing director at Hovde Private Equity Advisors. "You're restricted on the number of board seats, and your economic control is capped at a third or 25% in some cases. Many firms look at that and say it's very hard to make an investment in a company with those restrictions."
Todd Hagerman, a Credit Suisse analyst, said he does not believe regulators are willing to go much further. "They've eased the rules somewhat, but clearly they have drawn a line in the sand."
It is not just private-equity investors looking more closely at the banking sector. NewStar Financial Inc., a commercial lender in Boston, last week applied for an OCC shelf charter with the intention of acquiring a bank.
"This is a great idea on the part of regulators," said CEO Tim Conway. "We think it will bring more people like us to the table who are well capitalized and who will benefit from being able to grow faster" by having access to deposits. NewStar said it had a total risk-based capital ratio of 22.5% at the end of September.
Mr. Hagerman said he does not expect to see a flurry of shelf-charter applications because, if investment groups gained control of a failed or troubled bank, they would be barred from doing business in other sectors.
"It's a question of the basic foundation inherent in federal banking law: Are you potentially piercing the safety-and-soundness principles and source-of-strength doctrine by allowing free enterprise and commerce to enter the picture?" Mr. Hagerman said.
The limitation makes no sense to Mr. Ross. "We don't mind being a bank holding company — we don't mind being subject to regulation," he said. "But the idea that we couldn't invest in anything that's not a banking entity; that would constrict our business."
Mr. Ross added that a precedent had already been set for private equity to manage banks and return them to profitability. Several firms have done so for banks abroad. U.S. investors bought failed banks from the Japanese government during the Asian financial crisis of the late 1990s and turned them around.
One was Long Term Credit Bank of Japan, purchased by the New York private-equity firm Ripplewood Holdings. LTCB became Shinsei Bank. "It really revolutionized banking in Japan," said Richard Herring, a finance professor at the Wharton School.
Mr. Ross, too, bought a failed Japanese bank during the Asian crisis and revived it.
Mr. Herring said he believes the management expertise many private-equity firms possess would be good for banks. "They're pretty good at rethinking and improving the operations and organization," he said. "I think on balance they are a positive force."
