Flowers Raising $2.5 Billion to Buy Financial Assets

Flowers Raising $2.5 Billion to Buy Financial Assets

Sept. 27 (Bloomberg) -- J.C. Flowers & Co. has raised $2.5 billion from investors for a buyout fund that will target banks and other financial firms crippled by the global credit contraction, two people with knowledge of the matter said.

J. Christopher Flowers, founder of the New York-based investment firm that bears his name, completed an initial round of fundraising this month, according to the people, who declined to be identified because the process was confidential. The fund may raise additional money, the people said.

The former Goldman Sachs Group Inc. banker is amassing cash at a time when U.S. banks are being seized at the fastest pace in 14 years, with regulators closing 13 in 2008. Rival private equity firm TPG Inc., led by David Bonderman, lost $1.3 billion on its investment in Washington Mutual Inc. after customers withdrew $16.7 billion since Sept. 16, leaving the Seattle-based bank ``unsound,'' according to the Office of Thrift Supervision.

Flowers wants to ``take full advantage of the blood in the streets,'' said Michael Holland, chairman of Holland & Co. in New York, which manages $4 billion of assets. ``He had a coup in Japan and is going to visit similar opportunities in the U.S.''

Edward Grebow, a managing director at the firm, referred a request for comment to Flowers. A call to his office was not returned.

Flowers was part of an investor group that bought Long-Term Credit Bank of Japan Ltd. for 121 billion yen ($1.1 billion) in 2000, renaming it Shinsei. The group sold two-thirds of the company in 2004 for 532 billion yen. David Rubenstein, co-founder of the Carlyle Group buyout firm, hailed it as perhaps the most successful private equity deal in history.

Missouri Bank

The 50-year-old Flowers is turning his attention to the U.S., where the banking system is undergoing a transformation. Goldman Sachs and Morgan Stanley, both based in New York, converted this week from the biggest independent securities firms on Wall Street into bank holding companies, subjecting themselves to regulation by the Federal Reserve to shore up investor confidence. Lawmakers in Washington are negotiating a potential $700 billion bailout plan for the banking industry.

The private-equity firm has weighed investments in at least two financial institutions this year. Flowers advised Bank of America Corp. on its Merrill Lynch & Co. takeover earlier this month and tried to invest in American International Group Inc. before the government rescued the insurer this month.

Regulators last month gave Flowers approval to buy a nationally chartered bank in rural Missouri. According to a filing with the Office of the Comptroller of the Currency, he may use First National Bank of Cainesville, which has assets of $14 million and is located near the Iowa border in a town of 400 people, as a vehicle to buy ``troubled or failed depository institutions.''

`Known Quantity'

``Flowers went to Missouri and bought a national bank charter as cheaply as he could,'' said Steven Kaplan, a professor who studies private equity at the University of Chicago Graduate School of Business. ``That license will give him an advantage over competitors, especially with a new fund.''

Obtaining OCC clearance to buy a bank means Flowers is now ``a known quantity to them, which could help him acquire other national banks or give comfort to other regulators,'' said Mark Tenhundfeld, director of regulatory policy at the American Bankers Association, a Washington-based trade association.

The Federal Deposit Insurance Corp. said last month that 117 banks were classified as ``problem'' lenders in the second quarter, a 30 percent increase from the previous period.

Regulations that limit the activities of outside investors have historically kept buyout firms from pursuing bank deals. The Federal Reserve earlier this week clarified some guidelines, loosening restrictions on how much stock a minority investor may own, as well as how an investor may influence the company through board seats and contact with management.

Fortress, Carlyle

Fortress Investment Group LLC, the New York-based private- equity and hedge-fund firm that went public last year, said this week it would suspend its third-quarter dividend to shareholders and use the money to invest in financial institutions.

``Given the significant dislocations in the world's financial markets, we see tremendous opportunities for the firm to invest capital,'' Fortress Chief Executive Officer Wesley Edens said in a statement. ``We are focused on potential investments in banks, insurance companies and other asset management businesses.''

Carlyle, the Washington-based private-equity firm, in July said it invested $75 million in Boston Private Financial Holdings, a publicly traded wealth manager. Carlyle, which has more than $89 billion in assets under management, hired Olivier Sarkozy from UBS AG this year to run its financial-services investment group.

BLOOMBERG