December 5, 2010 9:32 pm

JC Flowers seeks new gains from crisis

Christopher Flowers is trying to put the past firmly behind him – the recent past in any case. The former Goldman Sachs banker, who made his name with a $1bn profit on an investment in Japan’s Shinsei Bank in the 1990s, has not had a good crisis.

His private equity business, JC Flowers, made one particularly ill-timed investment, buying into Germany’s Hypo Real Estate when he thought the crisis was virtually over, instead of really just beginning.

“Obviously our investment in HRE was a mistake,” says a deadpan, normally publicity-shy Mr Flowers on a whistle-stop visit to Europe. “We, along with many others, did not anticipate the extraordinary crisis [that followed] Lehman’s bankruptcy.”

But having lost more than €1bn ($1.3bn) on its investment in now nationalised HRE, Mr Flowers is again seeking crisis-hit opportunities. The business has stakes in 10 banks round the world, including Indymac in the US and NIBC in the Netherlands, but the $7bn fund it raised in 2006 is still less than a quarter invested. Two years ago it bolstered its firepower by raising $4bn from China Investment Corporation, Beijing’s sovereign wealth fund, to invest alongside its main fund.

“We don’t have a grand plan, we are not big enough to look at every deal. [But] we try to respond to what comes to our attention in an energetic and opportunistic fashion,” he says.

Even the dysfunctional German banking market is recovering encouragingly, he says, giving hope for the 10 per cent stake in Hamburg-based Landesbank HSH Nordbank that the business was left with after a state bail-out. The group is confident HSH, which is due to appoint a new chief executive by the year-end, will be profitable next year, allowing a potential initial public offering in 2012.

Yet its new dealmaking – with the group dipping its toe back into European banking – is a lot more modest in scale. For instance Kent Reliance, the mid-sized UK building society in which JC Flowers recently secured a near-50 per cent stake for £50m. It has assets of £2.2bn ($3.5bn), minuscule compared with HSH’s €161bn balance sheet. Crucially, though, Kent Reliance does two things: setting a precedent for private equity investment in building societies and providing a platform to build a broader banking business in the UK.

Aside from his US homeland, Mr Flowers sees the UK as the most attractive market for investment at the moment. He says: “Britain is a pretty good story – it’s not been dragged down by all the eurozone problems, it’s an open economy and there are lots of things which are changing.”

The UK banking sector is also highly consolidated, so profit prospects are relatively high. And there are troubled institutions that need to divest assets, so there will be opportunities to buy. “A lot of banking assets are coming up in the UK,” says Mr Flowers’ colleague David Morgan, managing director for Europe and Asia. “And following regulatory approvals, we expect to have a platform and a banking licence, so would be well placed for this, while many of the big players would be blocked by competition regulators.”

JC Flowers has already made tentative app-roaches to a number of UK mutual lenders that it thinks may need to raise fresh capital, such as Norwich and Peterborough Building Society. But these informal offers have so far been gently rebuffed by most mutuals.

The 600 branches due to be sold by Lloyds Banking Group are probably the most appealing asset, though the group has also been clear about its potential interest in Northern Rock, the nationalised lender that is set to be reprivatised in coming months.

Such deals are a more realistic prospect than an immediate build-up of the group’s presence in the building society sector.

The Kent Reliance deal, JC Flowers recognises, was a sensitive one. “Mutual banks are naturally suspicious of anything ‘different’ and we will try to make sure that Kent is accepted by the mutuals as one of their own, not rejected as a cuckoo in the nest,” says Tim Hanford, another managing director at the group. That could take years.

JC Flowers is cautious on emerging markets, though it is on the verge of a deal to invest in Brazilian investment bank Pactual. And Mr Flowers is far less enthusiastic about China than he is about his old haunt Japan, largely because of the relative competition for business.

“We could lie down on the highway in Japan and not worry about getting run over, it is that quiet,” he says. “Compare that with Beijing where I only have to walk down the street and I bump into some investor I know.”

As for the peripheral markets of the eurozone, the group came close to buying into EBS, the Irish building society, though that was shelved. The most realistic potential deal would be an equity injection into Bank of Ireland, which is desperate to avoid falling into majority government ownership. But with memories of German losses still in Mr Flowers’ mind, caution will be the watchword. “The eurozone is likely to offer opportunities,” he says. “[But] right now you have to be pretty brave to invest in Ireland or Spain.”

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