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SunTrust Private Equity Panel

SunTrust Private Equity Panel. May 20, 2009 Banking: A Private Equity Perspective. Private Equity and Capgen. (Don’t tell Mom I am a private equity banker….). CapGen: Focus on financial institutions – community banks (7500+) in particular Value Creation Entry Price

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SunTrust Private Equity Panel

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  1. SunTrust Private Equity Panel May 20, 2009 Banking: A Private Equity Perspective

  2. Private Equity and Capgen (Don’t tell Mom I am a private equity banker….) • CapGen: Focus on financial institutions – community banks (7500+) in particular • Value Creation • Entry Price • Earning growth • Financial engineering • Exit Price • Private Equity Performance: luck, skill or risk? • Problems • Overpaid • Reliance on leverage • Hoped prices would continue to increase • Strategy drift • Concentration

  3. Private Equity and Capgen (continued) • Results • Markdowns – 40-80% especially for 2005-2007 funds • Investors • Defaulting • Rebalancing • Fundraising • Context: Alternative Investments • Alleged benefits • Issues • Diversification • Skill or risk (…she thinks I am a piano player at a honkeytonk)

  4. Bank Valuation 101 (Value is an opinion…) • Cash flow: Net income less asset growth times required tangible common equity ratio (TCE) • Balance Sheet: Switch from income statement to balance sheet M = ROE – gM B Ke – g B Dropped from 2.5-3X in 2006 to 1.0-1.5x for performing banks - • Factors underlying drop • - decline in earnings due to charge offs • - decline in g (growth) • - increase in Ke (cost of equity) (… Price is a fact)

  5. Issues • Balance Sheet Value • Size of the Need • Due Diligence • Debt Overhang • Inverted Capital Structures • Negative Equity • Political Risk

  6. Situation I: Zombie Bank

  7. Situation II: Walking Wounded • Returns • Purchase Price & Recapitalization $230 mln • Terminal Value in Year 5 $450 mln • Year 5 ROA of 1% $ 30 million • Exit P/E of 16 • IRR – 100% Burn down – 9% • - 100% coverage – 8%

  8. Conclusion

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