The Wall Street Journal’s Deal Journal tells us that former Comptroller of the Currency and later Bankers Trust Vice Chairman Eugene Ludwig is forming a (target size) $1 billion private equity fund to acquire banks.
Now the bit the WSJ doesn’t seem to know is that Ludwig has been looking to form a fund in the $500 to $1 billion range since he left BT to establish Promontory Financial Group, a firm that does bank-related consulting, in 2001. I happen to have hired Gene as my attorney in the late 1980s when I had a senior banking industry job and Gene was a partner at DC law firm Covington & Burling. Although it isn’t listed on his site, he has done some roll-ups (as I recall in trust banking), which may have taken place via another entity.
If anyone could make a banking private equity fund work, it’s Gene, by having a simply enormous Rolodex and good commercial instincts. But banking isn’t an obvious area for a private equity fund. Aside from a regulatory regime that makes doing a deal more costly and time consuming, one is also faced by competition from “strategic,” meaning not always economically rational competitors. And the fragmentation of the industry means there are a lot of them.
In addition, the basic thesis, that the industry is well suited for consolidation, doesn’t hold. As we have mentioned before, the industry exhibits a slightly increasing cost curve, which means bigger banks are less cost efficient than smaller ones. Specialized, pure play financial player of various sorts likely would show scale economies, but diversified banks don’t. Any economies they achieve by cost cutting post acquisition could have been realized independent of the deal.
So with all due respect to Gene, if his fund gets funded now, it’s another sign of too much liquidity and desperation for return. Like the Blackstone IPO, it’s another indicator that the end of this cycle is nigh.