If the Feds fail to find big banks to buy SVB and Signature, the likeliest buyers are the one group they don’t want to sell to

It used to be the go-to bank for Silicon Valley. Now it’s on the block.

More from Fortune:

But rather than an overheated auction, regulators looking to sell off what remains of Silicon Valley Bridge Bank have thus far gotten a cool reception. Last weekend, the FDIC held an auction of SVB and was expected to announce a winning bidder on March 13. But a single buyer didn’t materialize, with large banks like JPMorgan Chase and Bank of America apparently passing.

Now bids for Silicon Valley Bridge Bank and Signature Bridge Bank are due Friday, a person familiar with the situation said.

Should the FDIC fail (again) to find a white knight to buy the whole bank, it will be forced to sell it off piecemeal, and that’s where private equity comes in, a group of investors the FDIC does not look upon favorably. Several alternative asset managers including Blackstone, Ares and Carlyle Group are interested in the $74 billion loan book and are evaluating whether or not to bid, several sources familiar with the sale process said. (Separately, Silicon Valley Bank’s parent firm, SVB Financial Group, filed for Chapter 11 protection in New York. Silicon Valley Bridge Bank is not part of the bankruptcy process.)

If the private equity players are allowed to bid and are successful, the transaction would not be considered a win from the government’s perspective. Blackstone and Carlyle both started out as private equity firms, typically buying controlling stakes in companies, often using debt, and then selling them for a profit. Many of the big PE firms have gone public and have diversified beyond buyout transactions into areas like credit, real estate and infrastructure. (Ares, by comparison, has always been a lender but also does private equity investing, as well as real estate and wealth management.) Now called alternative asset managers, the firms would buy the SVB loans at a discounted-can’t-lose price, said one buyout executive. “I’m surprised there wasn’t more interest [for SVB],” the exec said.

The process is a major reversal for Silicon Valley Bank, once one of the most powerful lenders for venture startups. Founded in October 1983, SVB banked nearly half of Silicon Valley startups. It had $209 billion in assets as of Dec. 31. More than half, or 56%, of its loans were to venture and private equity firms at the end of 2022, according to its annual report. SVB also pioneered the use of venture debt, which are loans to investor-backed startups, according to the company website. SVB catered to a strategically important market, which should make the bank pretty valuable, the executive said. “The fact that no one is stepping up makes me concerned that there are [SVB] loan problems,” the exec said.

The FDIC, with its auction of SVB and Signature, would prefer to sell a bank to another bank because it cares about the deposits, according to buyout executives. Regulators are concerned that buyers who aren’t regulated as bank holding companies could use the deposits to do something risky. (The Federal Reserve supervises and regulates all bank holding companies, according to the Federal Reserve Act of 1913.) This is one reason why following past bank failures the FDIC has sought other banks to buy them. For example, in 2008 JPMorgan Chase acquired Washington Mutual after it collapsed for $1.9 billion. JPMorgan Chase also rescued Bear Stearns when it bought the investment bank for $10 a share in 2008 at the request of the U.S. government. Jamie Dimon, J.P. Morgan Chase’s chairman and CEO, later said he regretted buying Bear Stearns. JPMorgan Chase isn’t stepping forward this time around for SVB or Signature. (On Thursday, several large banks, including JPMorgan Chase, agreed to provide $30 billion in deposits to First Republic, in a bid to rescue the lender.)

PE firms certainly have the financial wherewithal to do a deal: Collectively they have $1.92 trillion in dry powder, or unallocated capital, as of March, according to Preqin, a provider of data to the alternative asset industry. Private equity also has a long history investing in financial services, including banks, but they can’t just buy huge stakes outright. The Bank Holding Company Act of 1956, which gave the Federal Reserve oversight of banks, doesn’t specifically mention private equity but states that a fund or company that owns 25% or more of a bank’s voting stock, or exercises a controlling influence, is a bank holding company, according to Todd Baker, the former head of corporate strategy & development at three large banks and ex-partner with law firms Gibson, Dunn & Crutcher and Morrison Foerster, who teaches fintech at Columbia Law School. This means that PE firms cannot acquire more than 24.9% of a bank’s voting equity without becoming bank holding companies. If they did, this would subject the bank to onerous activities restrictions, capital requirements and ongoing Federal Reserve supervision, which is an “untenable position for PE firms,” Baker said.

The Bank Holding Company Act also doesn’t allow funds to “act in concert,” Baker said. Multiple private equity firms could theoretically invest in a single bank, but each would have to limit their stakes to 24.9% or less and agree to other restrictions on their influence, like not working together, he said. “It doesn’t make sense for PE firms to not work together to achieve business success,” he said.

A sale of SVB loans to an alt manager like Carlyle or a Blackstone also doesn’t bode well for the future of SVB as a whole, the buyout executive said. “Someone else would buy wealth management, investment banking, fund of funds business, but the commercial bank would be a very expensive restart with no loans,” a venture executive said.

Earlier this week, the board of SVB Financial Group named a restructuring committee to explore strategic alternatives for the SVB Capital and SVB Securities businesses, as well as other assets and investments. SVB Capital and SVB Securities are not part of the bankruptcy. Their sale has generated “significant interest,” a March 17 statement said.

Private equity might not be the FDIC’s first choice for a buyer, but as the saying goes, sometimes beggars can’t be choosers.

This story was originally featured on Fortune.com

More from Fortune: