June 23, 2017
Interviewed by: David Snow
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Navigating Regulations and Rising Rates

William Spiegel of Pine Brook Partners discusses the regulatory and interest rate dynamics impacting financial services investing today.

William Spiegel of Pine Brook Partners discusses the regulatory and interest rate dynamics impacting financial services investing today.

Navigating Regulations and Rising Rates

David Snow, Privcap:
We’re joined today by William Spiegel of Pine Brook. William, how are you today?

William Spiegel, Pine Brook:
I’m doing well. Thank you very much.

Snow: You oversee financial services investing for Pine Brook, which is a major investor in that space. I would love to hear your thoughts on what’s going on in the market today.

Spiegel: The previous administration and the regulators that worked with that previous administration spent a lot of time making sure that the system would be safe and would be sound and we would not experience another crisis. In doing so, they put a lot of pressure on financial services, more capital into the system, more transparency, more regulation and more oversight, all of which were good things, but it took the wind out of the financial services sales. As a result, you saw financial services lag behind the broader industries.

With the new administration, their policies have clearly been to spur economic growth, which they’re going to do through infrastructure spending and tax relief, and they’re going to do it by reducing the regulatory burden, not just on financial services but on the broader economy. As a result, financials have been unleashed.

Snow: Let’s continue to talk about regulatory reform, in particular. There are a number of ideas on the table. Which do you think will have the biggest impact on the profitability of financial services companies?

Spiegel: If I were to pick the one thing that was going to have the biggest impact that I know can happen, it’ll be toll from top. What I mean by that is a lot of the heads of agencies will be replaced by this administration. As the new heads of different regulatory agencies are replaced and they are told to have a kinder and gentler view or respect for the financial institutions, then the system will rebalance and the companies will feel that they can lend more effectively and they can spend less money on compliance. Maybe there’s less need for capital.

Snow: In your world, who wins and who loses in a rising interest rate environment?

Spiegel: Financial services companies are pools of assets. You have the capital that you raised to start those businesses. You have, in the case of insurance companies’ policy holders, funds. In the case of banks, you have depositors’ funds. So, you have a lot of excess cash that needs to be invested and that excess cash could earn a good return, when it used to earn 6%. Now that it’s earning less than 2%, it’s really hurting the return on equity of many financial services companies, if not all of them.
I think there’s two things. First of all, the excess cash will get invested at higher rates. Second, in the case of non-banks, they are spread business and, to the extent that rates rise and assets reprice, meaning the loans that I make reprice faster than the deposits or my cost to funds, you will have spread widening.

Snow: Let’s talk about the exit environment. I would imagine that, given the optimism for financial services or at least the comparative optimism, now is a good time for people who happen to own financial services companies because the valuations have risen dramatically?

Spiegel: There is a much better exit environment, both in terms of selling companies—because if you are a buyer, a strategic buyer in a bank, you feel that the regulatory process to get approval will be easier and the process in integrating, managing and growing is going to be better. If you have the opportunity to take a company public, there are more buyers today than there were people who were interested in financial services and people who are rebalancing their portfolios toward financial services right now.

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