Two private equity firms that led funding rounds for a soon-to-be bank could face a decision about their future involvement in the company: become bank holding companies or dilute their equity ownership to avoid the oversight that classification would entail.
In August, the Office of the Comptroller of the Currency granted preliminary approval of Varo Bank NA's application for a full-service national bank charter, putting the fintech startup on the path to becoming the first completely mobile national bank. Varo's approval is one of few granted by the OCC since the financial crisis, when some private equity firms pounced on the chance to recapitalize banks when their valuations were low.
Most of these investments have been resold, and few private equity stakes in banks remain today. Even during the height of this strategy, few firms crossed the ownership threshold that would then require them to register as bank holding companies. The Bank Holding Company Act defines that threshold as 25% of the voting securities of the bank, although some Federal Reserve interpretations have moved it down closer to 10%.
Ten years later, Warburg Pincus LLC and TPG Growth seem to be in a similar situation.
Warburg Pincus led funding rounds for Varo Money Inc., the fintech startup that applied for the banking charter, in both 2016 and 2018. The Rise Fund, TPG's global impact fund, was listed as a minority investor in Varo Money's $45 million series B funding round in January.
But the size of both private equity firms' current stakes in the fintech company are unclear. Warburg Pincus and TPG declined to comment on their capital funding positions, and Varo Bank declined to comment on capital funding or its future strategy.
In general, private equity firms are loathe to become bank holding companies to avoid the regulations and restrictions that the Bank Holding Company Act mandates, said Charles Horn, an attorney at corporate law firm Morgan Lewis & Bockius.
"Private equity investments, with rare exceptions, do whatever they can to avoid potential holding company status," he said in an interview, noting that investing in nonbanking activities for these holding companies is practically nonexistent.
A private equity fund that only intends to make investments within the banking industry — and thus not face limits on nonbanking activities — might decide to become a bank holding company, he added. The move is not unheard of. MatlinPatterson Global Advisers LLC, for example, invested in Flagstar Bancorp Inc. back in 2009, and its affiliated entity MP (Thrift) LLC still holds a 47.92% stake in the company.
Other MatlinPatterson funds also invested in the airline and managed care industries, among others, following the financial crisis. The private equity firm could not be reached for comment.
Following the financial crisis, Warburg was an active bank investor. In 2010, the private equity firm contributed in funding rounds that put $1.44 billion into several different banks, according to data compiled by S&P Global Market Intelligence. Since 2015, however, Varo Money has been its only banking or banking technology sector investment.
As part of Varo Bank's preliminary approval, the OCC requires the bank to have at least $104 million of initial paid-in capital, raised within 12 months of the preliminary approval. If that requirement is not satisfied or if the bank does not open within 18 months, then the OCC's preliminary approval will expire.
However, the fintech startup has already raised at least $72.4 million in two disclosed funding rounds from 2016 and 2018. That money can be used toward meeting the day-one capital requirement, OCC spokesperson Bryan Hubbard confirmed. Varo Bank's preliminary approval was just the fourth the OCC issued since the financial crisis, Hubbard said in an email. Only one, Winter Park National Bank, has received final approval and opened for business.
Varo Bank will "continue to expand [its] social impact and disrupt traditional banking models" as it pursues final approval from the OCC, said Maya Chorengel, senior partner at TPG's The Rise Fund, in an emailed statement.
