Private Equity Investments in the Financial Sector — A Regulatory Challenge

So far, takeovers of banks by private equity sponsors have been a rarity in Germany. One of the reasons for this may be that, as a result of the financial crisis, regulatory approval procedures have become increasingly complex and lengthy over time and have thus become a determining factor in the course of transactions. The regulatory requirements for the design and implementation of such transactions and the approval practice to date will therefore be briefly highlighted and discussed below.

In addition to earlier cases of acquisitions of stakes in partially distressed banks (for example, J.C. Flowers' entry into HRE, Lone Star's acquisition of IKB in 2008, or Lone Star's acquisition of Düsseldorfer Hypothekenbank (DüsselHyp), also by Lone Star, in 2010), particular mention should be made in 2014 of RHJ's acquisition of BHF-Bank (which has since been resold to Oddo) and the purchase of the German KBC subsidiary by Teacher Retirement System of Texas, Apollo Global Management, Apollo Commercial Real Estate Finance, and Grovepoint Capital.

It is noticeable that the regulatory approval procedures have become increasingly complex and lengthy over time.

The reason for this is the sometimes considerable transparency requirements, particularly in the case of private equity structures, which can include not only the direct and indirect shareholders and investors but also other portfolio companies of the private equity sponsor. Also, the material requirements of being bound to a long-term business and risk plan that is viable from the supervisory point of view, possibly combined with the willingness to provide further equity and liquidity in the event of a crisis, can only be reconciled to a limited extent with the investment approach usually pursued by private equity sponsors. Nevertheless, in view of the existing consolidation pressure in the banking sector, it seems quite conceivable that it will increasingly be targeted by financial investors in the future.