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Thursday, Feb 2, 2023

Banks Pursue Big Payoff in Private Equity Firms

Private equity firms have built a reputation of moving fast and doing big, flashy deals that banks can’t – or won’t – do. But recently, they’ve become increasingly important customers for those very same banks.

Rock-bottom interest rates and new regulations that have increased the cost of compliance have squeezed bank profitability at both ends. Enter private equity firms, which offer banks two important moneymaking opportunities: providing leveraged loans for the acquisition of portfolio companies and, after that, selling fee-generating business banking services to those portfolio companies.

Private equity firms often need massive loans and numerous bank services, which is why private equity banking is dominated by big banks such as Charlotte’s Bank of America Corp. and San Francisco’s Wells Fargo & Co.

But some L.A. banks, including Pasadena’s East West Bancorp Inc. and downtown’s City National Bank, are making a real effort to expand that side of their business.

The chief executives of both banks identified private equity banking as an important growth area in interviews with the Business Journal. City National and East West, with assets of $32 billion and $29 billion, respectively, are among the few local banks with the necessary size to enter the private equity banking space.

It’s no wonder those banks are pursuing private equity clients: They can be a lucrative business opportunity, said Rachel Morris, a senior vice president at Bank of America’s Century City office who primarily works with private equity firms and other financial sponsors.

When her bank lends money to a private equity firm to make an acquisition, she can then hand the acquired company off to the bank’s commercial banking division.

“Oftentimes when you are the lender and led the financing, it all kind of works together,” Morris said.

Private equity firms commonly buy businesses they intend to use as a platform for further acquisitions, each of which opens up opportunities for the bank’s commercial business teams to sell products such as corporate cash management, accounts receivable lines of credit, interest rate hedges and even foreign exchange services. All of those are profitable and generate fees, the Holy Grail for banks.

Craig Enenstein, chief executive of Brentwood private equity firm Corridor Capital, said a private equity owner like himself might also take a dividend recap, which is a cash distribution funded by a new loan.

Private equity firms are generally more comfortable taking on that kind of debt, which makes them more reliable bank customers, in that traditional business owners tend to be more conservative with their balance sheets.

“An owner-operator is dying to pay off debt and be done with it,” Enenstein said. “A PE firm wants to reload that debt and take a distribution.”

Deal Hawk

A group led by Ares Management Chief Executive Antony Ressler has agreed to buy the National Basketball Association’s Atlanta Hawks for $850 million.

Ressler, who ranked No. 42 on the Business Journal’s list of Wealthiest Angelenos with an estimated net worth of $1.1 billion last year, was a finalist in last May’s sale of the Los Angeles Clippers. His group’s $1.2 billion bid was beaten by former Microsoft Chief Executive Steve Ballmer’s $2 billion check. This time around, Ressler got his team.

A co-founder of the Century City private equity and debt giant, Ressler also owns a piece of pro baseball’s Milwaukee Brewers. The group he marshalled to buy the Hawks includes fellow billionaire Sara Blakely, the creator of Spanx, as well as her husband, Jesse Itzler, and former NBA star Grant Hill

Ressler is not the first L.A.-area investor to cut a deal to buy the Hawks. In 2011, Alex Meruelo of Downey’s Meruelo Group, which owns businesses ranging from a pizza chain to Spanish-language TV stations, reached an agreement to purchase a majority stake in the team for a reported $300 million. But the deal fell through later that year, reportedly because of an NBA labor dispute and other financial concerns.

The Hawks finished with the best record in the Eastern Conference this year and are playing the Brooklyn Nets in a first-round playoff series.

A spokesman for Ares did not respond to the Business Journal’s request for comment.

Alex Meruelo, meanwhile, hasn’t given up on becoming an NBA owner.

“Alex is still firmly passionate about an NBA franchise, so you never know,” said Xavier Gutierrez, chief executive of Meruelo Group’s Meruelo Investment Partners.

C-Suite News

Beverly Hills private equity firm Levine Leichtman Capital Partners has hired Robert Hays as managing director and co-head of investor relations. He was previously with H.I.G. Capital in Miami. … Asset-based lender Wells Fargo Capital Finance in Santa Monica has named Guy Fuchs chief operating officer. He is a 14-year veteran of Wells Fargo. … Century City’s 1st Century Bank opened its first Beverly Hills branch April 20. The bank is at Wilshire Boulevard and Roxbury Drive in the city’s famed Golden Triangle.

Staff reporter Matt Pressberg can be reached at mpressberg@labusinessjournal.com or (323) 549- 5225, ext. 230.

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