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PE and Small Banks

“There is nothing wrong with change, if it is in the right direction.” Winston Churchill

The recent crisis in the US has sabotaged many beliefs in the economic circles across the globe. Many myths that had percolated into the industry have been broken and some new have been made. However, the efficacy of these new myths remains to be seen. Having said that, one thing is agreed by one and all i.e. that the recent crisis has led to better awareness amongst companies and governments across the world that they can’t afford to be complacent.

 

A new trajectory that has evolved after the recent financial crisis is that a high volume of equity is being diverted towards small banks in the US. This is undoubtedly the repercussion of the changing sentiment in the financial circles where people are choosing to play it safe and settle for smaller returns than to opt for the higher paying risky alternatives. Is it good or is it bad? Well, it basically depends on how you look at it.

If you are a person who believes that the recent crisis was a one off and things will get back to normal soon, then you would be laughing at those who invest in these small banks. However, if you are someone who would like to play it safe, then this new change would not seem like a surprise.

Whatever the consequences, the current trend clearly points to the fact that people have become conscious of high-risk investments. The change is not only in the big players that rule the market but small investors too are vying for small banks. The reason for such a change lies in the basic structural functioning of smaller banks. They do not venture into high risk markets, have a strong and crystal clear management system and the volume of trade varies. Further, smaller banks are able to build good customer rapport due to personal attention given to individuals. For gaining a similar advantage, bigger banks shell out millions on advertising. The shift of private equity towards small banks is there to be seen but how long does this trend last is what remains unanswered.

Robin Trehan is associated with Credit Capital Funding. More information www.keyfunds.com

 

 

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