Friedman Billings Gets Private Equity Lifeline

A $100 million cash infusion from a private equity firm that's led by three former Goldman Sachs(GS) executives is providing badly needed luster to shares of Friedman Billings Ramsey(FBR).

The stock of the Arlington, Va.-based firm is up 16% since announcing last Thursday that Crestview Partners will invest $100 million in Friedman Billings' investment banking and brokerage business. Shares of Friedman Billings most recently traded at $11.52, their highest level in four months.

The deal with Crestview is part of a corporate restructuring by Friedman Billings, which is creating a separate subsidiary for its investment banking and brokerage business. The unit, FBR Capital Markets, will operate as a separate division from Friedman Billings' ailing mortgage-related businesses.

Crestview, a two-year-old New York private equity firm with $1.5 billion in funding, will own an 8% equity stake in the new investment banking subsidiary. Friedman Billings says it plans to raise an additional $300 million for the new FBR Capital Markets group by selling equity stakes to other investors.

Officials with neither Friedman Billings nor Crestview would discuss the transaction, which sets the stage for a possible spinoff of the firm's new subsidiary in a future IPO.

Shares of Friedman Billings, which reorganized itself as a high-dividend paying REIT in 2001, have fared poorly the past year with the slowdown in the mortgage market. The stock has been cut in half the past two years as the firm has taken huge writedowns in the value of its big portfolio of mortgage-backed securities.

Friedman Billings' investment banking and brokerage operations have fared better. Last year, the division generated more than half of the firm's $1 billion in revenue.

But Friedman Billings investment banking group also has been plagued by scandal, stemming from the firm's role in arranging a 2001 private investment in public equity, or PIPE deal, for a small Maryland security services firm. A year ago, Emanuel Friedman, the firm's co-founder and former co-chairman, retired after the Securities and Exchange Commission notified him that its investigation could lead to the filing of civil charges against him. The SEC also is considering filing charges against the firm's former top trader and its former compliance officer.