October 9, 2011
Interviewed by: David Snow
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Reinventing Financial Services

For private capital investors, the financial crisis was doubly painful – not only did investments made before the downturn suffer, but a hoped-for wave of troubled financial asset and bank deals failed to materialize.

In the video program “Reinventing Financial Services,” Privcap speaks with two experts about the shifting opportunity for private capital within the banking and financial sector and about how massive dislocation and regulatory uncertainty spell opportunity as much as risk. Joining the discussion are William Spiegel, managing director of private equity firm Pine Brook, which specializes in financial-services investments, and Satish Kini, a partner and co-chair of law firm Debevoise & Plimpton’s Banking Group.

For private capital investors, the financial crisis was doubly painful – not only did investments made before the downturn suffer, but a hoped-for wave of troubled financial asset and bank deals failed to materialize.

In the video program “Reinventing Financial Services,” Privcap speaks with two experts about the shifting opportunity for private capital within the banking and financial sector and about how massive dislocation and regulatory uncertainty spell opportunity as much as risk. Joining the discussion are William Spiegel, managing director of private equity firm Pine Brook, which specializes in financial-services investments, and Satish Kini, a partner and co-chair of law firm Debevoise & Plimpton’s Banking Group.

David Snow, Privcap: Hello and welcome to Privcap. My name is David Snow, founder of Privcap. Privcap delivers valuable context for private capital investment opportunities and practices, helping investors make better decisions.

Today we’re going to be talking about a very important topic, and that is – the challenges and opportunities in the financial services market for private capital investors. As we all know, in the wake of the financial meltdown, private capital investors sought to be on the creative side of creative destruction, with mixed results. And so we’re going to be talking to two very seasoned experts today about what the opportunities and challenges will be going forward. I’m very pleased to introduce these two gentlemen. I’m going to introduce first Satish Kini, a partner at Debevoise & Plimpton, and William Spiegel, managing director at Pine Brook Road Partners.

So welcome to both of you. Thank you for joining Privcap today. We’re talking about private capital in the financial services market. And of course when you say financial services, probably these days the first thing people think of is the fact that it went through this tremendous downturn, and in many ways we’re still coming out of that very slowly. I’m wondering if we could go back to the darkest days of the financial meltdown and talk about what people were thinking would be the opportunities for private capital investors and how those opportunities turned out. William, maybe you can start.

William Spiegel, Pine Brook Road Partners: Sure. I think that in the deepest darkest days, people were focused on banks. There are 8,000 banks or so in the country. Most developed nations have four or five banks that control most of the lending decisions, taking most of the deposits. And given the past crisis – the S&L crisis – given the meltdown in asset values, I think that people thought there was going to be a tremendous opportunity to invest in banks and participate in the consolidation of the banking system from 8,000 banks to 4,000 banks or 3,000 banks. Clearly that hasn’t happened. But I think that is where you saw the specialist firms like Pine Brook spend their time, and you even saw a lot of the generalist funds decide that they had to dedicate resources to financial services and particularly to banking.

Snow: Well let’s dwell on banks for a bit. What was it that prevented private capital from playing a bigger role acquiring or propping up banks? Were they simply getting competition from the government? What happened?

Satish Kini, Debevoise & Plimpton: I think some of it was regulatory as your question implies. I think there was some push-back from regulators, from the Federal Reserve, from the FDIC – some discomfort with private capital coming in, and not receptivity that people expected, as William said at the outset, given the raw numbers and given the extent of the crisis, which surprised many people. But instead the regulators were concerned about who was coming into the market, was concerned about private capital, preferred in many of these acquisitions so-called strategic acquirers – other banks that were already established and known to them. And so I think that affected some of the opportunity.

I think also may have been economics and other things as well that affected the opportunity from a private capital standpoint. But regulatory implications were very significant.

Spiegel: Many private equity firms who weren’t specialists didn’t understand the limitations around investing in banks that had existed for many years. It’s very difficult to own over 9.9 percent of a bank. You cannot own really much above 24.9 [percent]. There are certain circumstances you can own I think up to 33 [percent]. [To Kini] You’re the regulatory lawyer. So I think there was euphoria, opportunity in distress, and then people then realized it’s very difficult – I need partners, and I can’t get control. So that caused a lot of financial investors to pull back.

Something else happened, which is – I think the regulators did a very nice job of controlling the bank-failure rate. There were many banks that were insolvent, and there still are. But just because they’re insolvent didn’t mean that there was a liquidity crisis and there was a reason for the regulators to shut down the banks. And so they’ve only shut down 370 banks. And I say ‘only’ because there’s 8,000. The bulk of the banking system is made up of banks of less than $1 billion, and they’re in terrible shape still. But the regulators have done a great job of allowing banks that have not been in distress and have not had liquidity crises to survive, to see if they can live for another day. So I think that by not failing that many banks they haven’t had to rely on private capital to help rescue the banking system.

Kini: I think William makes a great point on that. There was an initial expectation that there was going to be [these] 8,000 banks that was going to have several thousand failing at a rapid clip. That did not happen. There still is opportunity out there because we still know that from the FDIC’s problem-bank list, there’s over 800 that are still on that list – now, they don’t identify the specific institutions. They just give us the raw numbers. That number has not continued to grow – it has leveled off. It’s not declining. And people expect that we’re about in the first third to halfway point in this crisis, so we’re still going to have a lot of supply out there of failing banks, and there may still be opportunities to make acquisitions. And as private capital becomes more adept at working with the regulators and understanding the regulatory framework, there may be opportunities going forward.

Spiegel: Right. It does seem to me, though, that the regulators have pushed for strategics to be the first-choice buyers. And so by letting the banking system heal itself. . . as they continue to fail some of the smaller banks, they’re encouraging the larger institutions to buy those banks and not encouraging private capital to come in. So the only banks that are really available to private capital are those aren’t wanted by the strategics. And they’re not wanted for a reason. It’s unlikely that we’re going to be too attracted to them.

Kini: And I think you have a good point there. The crisis is not a uniform one among the 50 states, as you well know. It’s a crisis that’s very geographically focused. So you have a large number of failures in Georgia, in Florida, some in California and Washington State. You may have situations where there are opportunities that private capital is not interested in given the geography. You may also have situations where the strategics in that particular state are no longer interested because they’ve bought up what that want in that state, and you still have more failures in that particular location.

Headlines and Politics


Snow: Isn’t it the case that part of the enthusiasm for going out and [saying], let’s buy a bunch of banks in the middle of the crisis, was people had a memory and a knowledge – and perhaps even participated – in the early 1990s during the savings and loan crisis, and made a lot of money buying assets as part of a government process. So why did regulators not allow that type of process to be recreated for our current crisis.

Kini: I think what you’re talking about is some of the loss-share agreements and some of the different ways in which government helped acquire or buy institutions. And again, in the beginning of this crisis you saw some loss-share agreements that appeared very favorable to purchasers and to private capital. Very quickly, however, the favorability of those agreements changed, and because, as William said, the crisis was managed in a way that didn’t have the huge numbers of banks failing all at once, the government was able to get into situations where it did not feel the need to offer those same types of agreements. There still are some loss-sharing agreements available, but the terms are very different than those at the very outset of the crisis.

Spiegel: The government was in part motivated by political factors. I don’t think they wanted to see private equity or hedge funds or private individuals come in, get great loss-sharing agreements and look like they’d taken advantage of the taxpayers. Even though it might have been the right thing to do. Because if a bank failed, the regulatory obligation is to find the least-cost solution. And private capital was available. But I think that the regulators discouraged private capital because they were worried that if one of the big private equity firms made too much money too quickly, it would have been all over the headlines and there would have been a little bit of a political embarrassment. I don’t think that was necessarily the right decision, but I think that the way they have handled it over time has been right. They have carefully controlled failures, and they have carefully steered banks to the right strategic acquirers. And we probably will get to a banking system that has 5,000 banks, but it might take 10 years. Whereas in reality if you looked at the financial health of the banks, it probably could have occurred within one or two years.

The Bank Opportunity Today


Snow: So, we’re not only going to be talking about banks during this discussion, but let’s talk about the forward opportunity for acquiring banks and investing in banks. What does that opportunity look like now for private capital? Are there still good opportunities available or has it largely passed by?

Kini: Again, in terms of sheer numbers, I think there are opportunities and there will continue to be opportunities. There are, as William very nicely put it, there is a huge number of banks and we expect to see a contracting industry. We expect to see a contracting industry because of economic reasons, because of the regulatory and legislative changes that have come on after the crisis, which are going to make it much more expensive for small banks, and all banks, really, to continue to operate. So I think there are going to be opportunities out there to make investments in banks.

There are also other areas – I know we haven’t touched upon them yet – but in specialty finance and in other market places around the banking sector that are also going to have opportunities in them. So I think there will be opportunities, and it will just be a question of whether those opportunities present the right kind of economics to attract the private capital into it.

Spiegel: I think there are still opportunities. As I said at the outset, a lot of private capital was excited, and has pulled back. You’re now left with the investors that have an understanding of banks, and still think that banks are a long-term, good opportunity. What happens economically is going to determine, in my mind, what the opportunities for investors are. We are in an interesting period. Now it looks like slightly rising unemployment, you’ve got an economy that’s slowing down, you’ve got real estate prices still declining. So I think the financial health of the banking system is still fragile, and if it turns the wrong way, then that failure rate will increase, and there will be more opportunities for private equity. If the economy continues to grow, I think that the banks will have been saved by the economy, by real estate prices stabilizing and by the logical acquirers, which are the larger banks.

I also think the strategies have changed dramatically. Everybody was focused on failed banks at the beginning of the crisis, and I don’t think that’s where people are focusing anymore. First of all the regulators made some tough decisions about the cost of private equity entering the failed-bank arena. Maybe we’ll talk about this later. They made it more punitive for private equity to buy a failed bank than for a strategic to buy a failed bank. Why, I’m not certain. [To Kini] I’m sure you have some views on that.

So I think buying failed banks is not where people are going to be spending their time. It’s more on healthier banks that are stuck at that $1 billion that don’t know where to go and could use a capital injection in order to get to the next level, and either help consolidate their smaller brethren or actually take advantage of a local economy where a lot of the banks are weak. And that $100 million injection might actually allow them to take advantage of lending opportunities. So I think there are opportunities, but they’re specific.

Snow: So is it the case that private equity’s image problem led them to, as you mentioned, not being the favored buyer of some of these assets?

Kini: I don’t know if it’s as much image. It may have been some image, it may have been some political considerations. I think that some of it was simply an unknown factor. The regulators are comfortable in a certain field, and were comfortable with banks acquiring certain institutions because they already knew what to expect. There also was just from the private equity standpoint, a lack of knowledge about the regulatory system, the amount of knowledge that regulators would seek to have about acquirers of failed banks, and some of the other implications of owning a bank. So from both sides I think there was a little bit of an educational process. And I think both sides kind of had to learn about each other. And that caused things not to work as quickly as people thought things might occur at the outset.

Spiegel: I think we’re through that now. I think early on it was political considerations, image problems, and I think the FDIC came up with rules, private equity decided – I will participate, or I won’t – in the failed banking process. And some decided to. We at Pine Brook have bought a failed bank, and we’re comfortable with the rules. Once we settled on equilibrium, those that wanted to invest could invest, and the regulators had set the terms by which we could play in the sandbox together. And I think it’s worked out okay.

Kini: I think that’s right. There now seems to be a core group of private equity firms that are comfortable in the arena. The regulators have gotten comfortable with that core group because there’s now been a fair amount of knowledge between the two, and that does seem to be working. [To Spiegel] Also, to pick up a point that you made earlier, you now see private equity firms adding equity investments in live banks that maybe need to get to that next level so that the live bank can make add-on acquisitions or can pursue a strategic game plan. So private equity is perhaps participating in different ways in the banking industry. Rather than making the acquisition of the failed bank directly, the way that people maybe thought would occur naturally at the outset of the crisis.

Opportunities Beyond Banks


Snow: Certainly banks are not the only feature of the financial-services landscape. There has been a tremendous amount of change and, one might say, creative destruction in the space. As you survey the landscape now as an investor, William, what kinds of opportunities do you think will attract private capital.

Spiegel: I think there are two areas right now that are of interest. One are is the unbanked. And I think that the ranks of the unbanked are going to continue to grow.

Snow: And by that you mean people who do not have bank accounts?

Spiegel: Literally, people who do not have bank accounts. [To Kini] And again I’d be interested in your view on this in a moment, but some of the regulatory changes which have taken fees away from banks have meant that banks will no longer be able to subsidize things like free checking. So I think free checking is going away, which means banks are going to fire their clients, or clients are going to choose to leave the banking system. So I think the ranks of the unbanked are going to grow, and therefore how can you offer both lending services and depository services to the ranks of the unbanked is going to be an interesting area to spend time. That’s one area.

The other area is still around real estate, both commercial and residential real estate. We see prices continuing to fall, and we regulatory issues still unresolved as to what to do with Fannie and Freddie. And so where there’s regulatory uncertainty there’s usually some level of opportunity.

Snow: So if I were enthusiastic about building an investment thesis around the unbanked or around the ongoing real estate opportunity, but I didn’t really understand the regulatory landscape very well, what might I bump into on the way to success?

Kini: Well certainly in terms of both of those areas there’s a great deal of regulatory uncertainty. I think that one of the difficulties that people have in terms of formulating an investment thesis – at least from our work with certain industry participants – is trying to understand what the rules are going to be. So for example what are the rules going to be for dealing with retail consumers with a new agency – the Consumer Financial Protection Bureau, which is still not headed by anyone. It’s still coming together. Its full penumbra powers are still unexplored. I think that uncertainty – I’ll defer to William – probably creates some opportunities and some ways in which people can effectuate investment theses. But it also creates problems for some investors, who are really trying to figure out, well, is this a time to get in? And as you see in terms of some large financial institutions that are trying to get out of these markets, is this really a time to exit?

Regulatory Surprises


Snow: Let’s talk about how regulations affect investment opportunities for private capital investors. In the wake of the financial meltdown there have been a whole raft of new regulations and proposed regulations and uncertainty, as you mentioned. Within all of that regulatory change, what took both of you most by surprise.

Spiegel: The one specific item that surprised me – and I’ll go back to banks, I’m sorry but it was the big topic for so many years, and I think it still is. What surprised me was when the FDIC increased the capital requirements for private equity firms. So they made private equity firms put up more capital than a strategic would be required to put up in buying the same institution, and hold those capital levels for longer, is the way the rule worked. What surprised me about it was, we were in the middle of a financial crisis, we needed to save our banking system potentially, and yet the regulators were discouraging private capital from entering. And if you think about it, if we require a certain return on equity to do a deal, and now the regulators are saying, you must put more capital against that opportunity, the only way to get that same return is to reduce the price. So if we had to reduce the price, and we the financial industry were the buyers, then clearly the FDIC, and therefore the government and the taxpayers were taking in less capital than they could have if they had just kept capital requirements the same for private capital and for strategics. So I was surprised at that rule, and I think that kept, as we said earlier, financial buyers away from banks, and I know it hurt the bids that the regulators received, and therefore it hurt taxpayers.

Kini: Yes I think that caught many people by surprise, so you weren’t alone in that. Going back to your question and taking it outside of the banking field, in terms of surprises I think there were probably two in terms of the legislative process that came about. One is, many people were surprised by the Volcker Rule, which changes what banking organizations can do and participating in hedge funds and in private equity funds. That really came out of nowhere late in the legislative process, from a kernel of an idea that really wasn’t in favor, and really was born out of – seemingly – Scott Brown’s victory in Massachusetts and the need for the administration to turn the dialogue around a little bit. And out of nowhere came this. And when it appeared on the legislative scene people said, well there’s no way that can be part of the legislation, and then lo and behold it’s in there, and we’re still waiting to see what it means.

The other reaction I have in terms of surprises is, I would say we still don’t know what they are, because so much of the Dodd-Frank legislation, enacted in the wake of the financial crisis, is an open invitation to regulate, for the Fed, the new Consumer Financial Protection Bureau, the other agencies. How they go about how to mesh all of these regulations is something that will take another four, five, six years to see, and within that process there will be surprises that we can’t conceive of right now.

Snow: So whenever there is regulatory change there are challenges but also investment opportunities. I’m wondering if either of you are aware of some interesting themes that have emerged in the wake of Dodd-Frank, in the wake of the Volcker Rule, as far as how one might deploy capital in expectation of some of these changes?

Spiegel: The Volcker Rule – the ban on proprietary trading – I think is interesting. It created more opportunities for hedge funds. It created opportunities for people inside investment banks to say, now’s my chance to leave and set up another asset management firm, either in the form of a hedge fund or some other investment vehicle. I don’t know of too many private equity firms that have backed these individuals who have left investment banks, but that doesn’t mean they weren’t good investment ideas. It’s added to the asset management world, it’s added to the alternatives world. It’s taken return away from the investment banks. The larger investment banks and the larger commercial banks – since they’re one and the same these days – are becoming regulated utilities, and therefore they’re ROE is going to fall. People who got used to the – free-wheeling’s the wrong word – ability to trade and make money on their own ideas aren’t going to want to be part of those regulated institutions and have voted with their feet and have left and formed hedge funds. And the alternatives world continues to boom.

Kini: The penumbra of regulatory changes is going to really transform, particularly the very large, bank-centric firms, the large banking organizations, both from the increased capital requirements that are going to come out of Basel III, out of Dodd-Frank, the living-wills requirements so that these firms have to try to be simple and be able to be unwound in an orderly fashion in terms of liquidity requirements and standards, in terms of some of the compensation rules that are going to go into place. I think what you may find is, some of these firms – and I think we’ve seen some of this already – are looking for ways to unwind and get out of business areas in which they’ve traditionally participated, because they don’t think the economics of those are as favorable as they used to be. I think that there may be some opportunities for private equity to participate and to acquire some of these businesses as they are being shed by the large firms. Earlier this spring, Citi determined to sell off its consumer financial business, OneMain, it’s been reported, because of some of these types of considerations. I think there will be other similar spin-offs and sales of parts of these very large financial services firms and there may be opportunities to make acquisitions in those areas.

Spiegel: The problem is with what’s being spun off – so far there’s been a lot of specialty finance businesses that have been spun off. That’s great, except specialty-finance businesses lend long, or more importantly, even if they don’t lend long they’re wholesale funded. So you can’t spin off [what was formerly called] CitiFinancial that effectively without providing some sort of financing arrangement. And they’re doing that in some of these cases, but I think the specialty finance business model right now is challenged because they’re wholesale-funded institutions that caused a lot of problems last time the banks pulled their lines. Specialty-finance companies were forced to sell off their assets. The regulators are now tougher on banks as to where they can lend, and banks lend to these specialty finance companies. So some of these regulations. . . I find this very curious – the administration is out telling banks, lend, or finance companies, lend. The regulators are inside banks – they’re not inside specialty finance companies – saying, you can’t lend because you’re challenged, and by the way you don’t know how to do any lending other than real estate. And so some of the regulation is fighting itself. The rhetoric on the one hand combined with the regulation is resulting in limited lending.

Where we see opportunities right now is in the smaller end of the market. Lower middle-market companies – nobody wants to lend to them. The sub-prime consumer, the unbanked – nobody wants to lend to them. The opportunities right now are on the fringes, they’re in the seams, they’re in the niche areas. One last thing – go back to banks again – this regulation is creating costs inside banks. It used to be a $1 billion bank was a bank that was at scale, and I don’t know any more if that’s now risen to a $2 billion bank or a $3 billion bank. So the regulators – maybe this is what they want – they’re going to force consolidation on the banking system, even away from bad loans and bad assets.

Uprooted Human Capital


Snow: One of the things that you often hear about in the financial services industry is that a lot of these companies – they’re only assets are the people in the organization. And certainly the asset management types of organizations tend to be all about, the true assets lie with the people. In the financial meltdown there was a lot of talk about, oh you can get very talented people on the cheap – they’re looking for jobs they’re looking to establish themselves in a new place. Is that still the case? Are there still people eager to be backed by, to set up a new company or to establish themselves in a new opportunity?

Spiegel: I think there’s always entrepreneurs – that’s what makes America so great. The crisis might have resulted in people who found themselves out of jobs showing up at private equity firms with business plans. But there’s never been a shortage of good talent who want capital to match a business plan.

The problem became, when you looked at people who came to you after the crisis, it was hard to tell. . .  likely their businesses blew up – was it their fault or was it a systemic problem? And by the way they looked wonderful from 2002 to 2007, so they were heroes. And they had made more money than God. But were they lucky or was there skill there.

We’ve spent a lot of time at our firm going back 20, 30 years to try to understand, what did the banking system look like, what did the specialty finance system look like, and try to get a sense of what the economics were for each of these different businesses back in more normal times, which is where I think we’re heading. And then we’re trying to see, do the businesses make sense? And then we’ll try to match the right talent. But there’s lots of talent, and there always is in financial services.

The Hedge Fund Factor


Snow: You mentioned hedge funds. I’m interested in your views on the extent to which hedge funds will be participating as lenders, playing a role in the financial services market other than promulgating their investing strategies. We saw leading up to the market peak that they were starting to get involved in lending, in doing private equity style deals. How has that changed and how do you see hedge funds fitting into the overall market today?

Spiegel: I’m not that familiar with the investors in hedge funds and what kind of restrictions they’re putting on hedge funds. A lot of hedge funds had to put up gates, which meant they had to prevent investors from taking out their money because they had liquid securities falling in price and they also had a lot of investments that they put into their side pockets. What we’ve seen is, hedge funds are no longer putting things in their side pockets in quite the same way. So they’re not competing with us on the private equity front. But where they are entering is in some of these niche lending businesses that we talked about – one- , two- , three-year loans that the banks aren’t doing, specialty finance companies aren’t doing, that generate good yields, current pay, cash pay, and I think that hedge funds are starting to play there.

But they’re not competing with us like they used to in the private arena, which is good because their mentality is very different. To be in private equity you have to [have a] five- to ten-year focus. You have to determine what is the environment going to look like in the future. And to be in the hedge fund business, in general you’re thinking about what’s happening tomorrow – that’s an extreme case obviously. But when they’re making an investment that’s illiquid, I think it’s harder for them to think ahead in the way that we might think ahead. So I don’t think they make great partners for private equity firms.

Private Equity: The New Wall Street?


Snow: Private capital is playing a role in helping to transform a new financial landscape, in helping to create the new face of Wall Street. But in many ways, firms that started life as small private equity firms have become the new face of Wall Street and are becoming forces in their own right across a range of services. I’m wondering if we can talk about whether we think this is a sustainable trend. For example, the term merchant bank is often used now to describe what a very large private equity firm does. It does investing, it does some advising, it manages a number of different kinds of assets. Is this sustainable? Is this the new look of Wall Street, and will some of these big private equity firms have a permanent role in it?

Kini: That’s a tough question.

Spiegel: Yeah that’s a tough question.

Kini: I think from my perspective, from being a lawyer in the regulatory space, I think there will be opportunities for these firms, particularly as the traditional large banking organizations and investment banks have to retrench, have more costs put on them, have people maybe leaving them because of some of the restrictions, because of the compensation limits that come into play. So there may be opportunities for the large private equity firms and some others in the non-regulated space. I think the regulators are concerned about that, and are concerned about whether the costs to the regulated space does ended up pushing things into what they consider to be the unregulated space. So I think there will be attempts both from regulators to reach out to the unregulated space that may affect things, as well as attempts to be careful about what the regulations are on the regulated financial services industry, to make sure that the competitive equilibrium doesn’t get out of whack.

Spiegel: I don’t think that that many firms have made the move from private equity to advisor to distributor of securities. There’s a couple – one or two that have tried it and we’ll see if they’re successful. I think it creates all sorts of regulatory problems. What you are likely to see is a trend in our industry, I believe, that the mega-deals are done for a while, maybe permanently, and you’re likely to continue to see specialization and smaller funds and maybe a series of niche funds or specialized funds that work with the main funds. You have to decide as a private equity firm, are you going to be a brand? Or are you going to be a boutique? But entering the regulated world. . . I mean, we’re all running to not be part of that world. So I just don’t see too many firms heading in that direction.

Reasons to Be Bullish


Snow: So William, you are an investor in financial services companies, and Satish, you advise many firms who want to get involved and you help them navigate the landscape. As you look forward at the opportunity, what makes you most bullish? What do you imagine to be the drivers of success over the next five to ten years for your investment strategy?

Spiegel: Well we by nature are growth equity investors. We are not buyout guys at all. We don’t put leverage on our business. We are what I consider to be classic merchant bankers, which is looking for great management teams with great business plans and providing them with capital to grow. And we usually find those opportunities occur in the face of dislocations. We just went through a massive dislocation. Another example of a dislocation is a hurricane. But those are the obvious ones, those are massive dislocations. There’s always little events happening, because of the regulatory landscape changing, or a decision by a large strategic to exit a particular niche. That creates opportunities. We divide the world into about five or six different sectors. We look at financial technology, we look at asset management, we look at depository, specialty finance and then the different areas of insurance – specialty insurance, life insurance, re-insurance, etc. The nice thing about financial services is – always one of those sectors is having a problem.

Snow: From your perspective, that’s the nice part.

Spiegel: It’s a nice thing for us. It creates a constant flow of investment opportunities for us. And I think the reason that this happens is, I don’t believe financial services companies are growth businesses by nature. What they are is – you should focus on return on equity. You should focus on growing your book value per share. What that means is, there’s times to grow, and there are times to pull your hand off the accelerator and distribute cash back to your shareholders. Companies forget that, especially when they’re public. So they always grow. And what happens when you grow? To get growth, you have to reduce your credit quality and find ways to skimp on the margin, and you create the seeds of your own destruction. As an investor, as long as we’re following those trends, we’re always going to look at, where is there a problem, and therefore where should we put money. Right now, I think it’s in the niches, it’s in the seams, because I think the credit crisis, we’re more or less through that.

Kini: From the regulatory viewpoint, there are a lot of changes still to come. There is a lot of dislocation that is going to come out those changes. There’s going to be, I suspect, opportunities. And for the clients that we work with, I think they are finding lots of interesting things that are at least looking at across a number of areas that we’ve talked about already, whether it’s in banks, distressed banks, or whether it is in specialty finance or in real estate, where banks are trying to shed some of the real estate assets that they have. So both the economic trends and the regulatory and legal landscape changing as it is, I think, creates dislocations and resultant opportunities that we see from our clients vantage point all the time.

Snow: And would you describe your clients as bullish and raring to go?

Kini: I think there’s probably some that are in the bullish camp and raring to go and really looking for ways to deploy capital, and there are others that are more cautions.

Spiegel: I think it is always treacherous when you’re dealing with regulated industries and you have to have good lawyers, and you have to have real industry specialization, so while I said earlier that there’s always sectors to invest in, you’ve got to be careful and you’ve got to be cautious. And I don’t believe that there’s a lot of $500 million to $1 billion deals out there. I think a lot of the deals are smaller, and therefore they’re smaller check sizes that over time you can grow into. And that’s the way we like to approach financial services.

Snow: So it’s possible to lose your shirt in financial services?

Spiegel: It’s possible to lose your shirt in every industry. Equity is the repository of all risk.

Snow: Well, this is a big topic and I think that we should pause for now. Thank you very much to both of you for coming, and as we continue to talk about the financial-services opportunity going forward I hope I can have both of you back to continue the conversation.

And thank you for watching the program. This is Privcap. . . see you next time.

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