Among the numerous investment options available, a recently revitalized asset is private bank stock investments. Across the alternative asset marketplace, many financial professionals are seeing seasoned investors starting to focus on one of the few industries that will benefit from rising rates: banks. These investment options are created when established, privately-owned banks are looking to expand, add new technology resources for their customers, or create cushions to help them weather economic swings. They are also created at a bank start-up – often de novo banks that are looking to build their deposit and loan base from scratch. Despite their stagnancy in the financial sector in the past, de novo banks and established privately owned banks are starting to experience an increased demand for capital-raising efforts. The renewed search for capital directly correlates to the impact the economy has seen from the financial crisis spanning from 2007-2009 (the Great Recession), the current economic state, and the ever-increasing regulatory and legal factors – marking bank capital raising as a trend to spotlight.
The Landscape
Market Opportunity
A rise in interest rates brings with it a higher net interest margin, suggesting these entities are operating profitably.1 This concept is confirmed by the fact that de novo banks are turning a profit much quicker than in previous years. Historically, it has taken de novo banks an average of 8.6 quarters to reach operating profitability – in the last several years, that number has dropped to 6.8 quarters.2 Market demand can also be a driving factor, regardless of market stability – if a community is in need of a new bank, those involved in launching the new bank are unlikely to be deterred by inflation or a looming recession.3
Additionally, private bank stock can be an appealing investment option during times of uncertainty for a few reasons. Previous studies have shown that “separating ownership from control can lead to shirking and prerequisite consumption by management, thereby compromising operating efficiency and profitability.”4 In turn, privately-held financial institutions operate more efficiently and are able to circumvent challenging economic conditions better when compared to their publicly-traded counterparts.
Capital Raising Trends in Banking
One significant hurdle in banking caused by regulatory requirements is expenses. All bank sectors have seen a dramatic increase in regulatory fees relative to earnings and credit losses since the Great Recession. Additionally, the software and technology required under the current banking regulatory requirements can be costly, causing some de novo organizers and privately-owned banks to struggle to meet these higher cost requirements and seek out additional sources of capital. According to BankingStrategist.com, prior to the Great Recession, the average capital requirement to fund a new bank was $15 million. Currently, the average capital requirement is now at $33 million.5
Trends in Capitalization Requirements (since 2008)
Chart Source: BankStrategist.com
Raising Funds Faster with SDIRA Investors
For de novo banks and existing privately-owned banks that are looking to gain a competitive edge, tapping into self-directed IRA (SDIRA) investors is a smart move for capital raising efforts. With more than $12 trillion in the IRA market, IRAs are the largest pool of assets in the $33.7 trillion U.S. retirement market.6 When it comes to alternative investments, private bank stock falls under the private equity asset class. For the organization looking to raise funds, the greatest benefit of a private equity investment like bank stock is the company’s ability to remain private. For the investor, the greatest benefit is that the investment is able to grow in a tax-advantaged account.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration. Regulation D (Reg D) offers exemptions from the registration requirements. A Reg D offering is intended to help small companies raise capital that could not otherwise defray the costs of a normal SEC registration.
For de novo banks and privately-owned banks looking to raise capital, Reg D benefits include (when compared to other financing options):
- Reduced regulatory hurdles
- Reduced legal costs
- Quicker capital raises
- Greater control over business operations and management
Investing in privately-held organizations like those that leverage Reg D offerings certainly isn’t for everyone. For investors who are particularly knowledgeable in their field or have a knack for spotting companies on the rise, alternative investments – like private bank stock – can make a great addition to a retirement portfolio. Some benefits include:
- Greater control over investment choices – invest in companies you truly believe in
- The ability to buy, sell, and exchange equity within tax-advantaged accounts
- Expanded diversification of your retirement portfolio
- The ability to leverage a wider range of investments that you know and understand
Tax-Advantaged Investing
Private equity investments can range from partnerships investing in a real estate venture, to high-risk, high-reward investments in start-ups such as de novo banks, to private bank stock options. The IRS allows investors to hold private stock within their tax-advantaged IRA as long as certain criteria are met. Among the rules and regulations, privately-held organizations must be registered as a private company stock of a closely held corporation, private limited partnership, or private limited liability company (multi-member LLCs only; single-member LLCs are not permitted).
To learn more about private equity investments, visit our Private Equity page or our Private Equity FAQs. If your organization is considering embarking on a capital raise, contact our self-directed IRA experts to learn how simple it can be to expand your offering to self-directed IRA investors.
1 Next in Banking and Capital Markets. PWC. https://www.pwc.com/us/en/industries/financial-services/library/next-in-banking-capital-markets-trends.html
2 Q1 De Novo Banking Trends. Troutman Pepper Hamilton Sanders LLP. https://www.troutman.com/insights/q1-de-novo-bank-trends.html
3 Albicocco, N. Mangulabnan, X. De Novo Bank Boom Hindered By Elevated Capital Requirements. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/de-novo-bank-boom-hindered-by-elevated-capital-requirements-71828705
4 Kwan, S. H. Risk and Return of Publicly Held Versus Privately Owned Banks. Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/epr/04v10n2/0409kwan.pdf
5 De Novo Bank Chartering Trends. Banking Strategist. https://www.bankingstrategist.com/de-novo-bank-chartering-trends
6 Release: Quarterly Retirement Market Data. Investment Company Institute. https://www.ici.org/statistical-report/ret_22_q2
