Efforts to recapitalise the US banking system took a crucial step forward as a group of mutual funds and hedge funds led by Corsair Capital, a little-known private equity firm, prepare to invest $7bn (£3.5bn) in National City, the 10th-biggest US bank.
The recapitalisation followed efforts to sell the bank, which has long been the focus of take-over speculation.
Like many regional lenders, National City, which is based in Cleveland, Ohio, has been hard hit by mortgage losses. The bank lost $333m in the fourth quarter.
The National City deal comes weeks after TPG led a $7bn recapitalisation for Washington Mutual, the largest US savings and loan association, and only days after Wachovia announced plans to raise $7bn from shareholders.
Bankers and investors described the National City transaction as emblematic of the second wave of rescue finance deals that have followed the collapse of the US subprime mortgage market and the ensuing turmoil in global finance.
In the first wave, sovereign wealth funds from Asia and the Middle East took stakes in leading Wall Street banks such as Citigroup, Merrill Lynch, Morgan Stanley and UBS. In the second wave, smaller, more regionally focused US banks are receiving capital infusions.
Although TPG, a private equity firm, led the first such deal – for Washington Mutual – people familiar with the transactions say the next wave of rescue finance will come increasingly from mutual funds, hedge funds and other investors in public securities.
TPG developed a template for doing such deals, bankers say, making it easier for investors to pursue such opportunities.
However, the other big private equity firms are unlikely to participate in the second wave of refinancing – just as they were absent from the first.
The Corsair-led group clinched the recapitalisation deal after many of the largest private equity firms, including Blackstone and Kohlberg Kravis Roberts, dropped out early in the process.
The winning group has little of the safeguards and governance rights that private equity firms usually require, according to people familiar with the deal.
Many private equity executives also believe it may be too early in the cycle to invest in beleaguered banks.
National City shares were down 16% at $6.98 in mid-morning trading on Monday after the company’s board gave approval for the deal.
Additional reporting by Ben White