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Fortress/AIG Deal Hints at PE Push Into Consumer Credit

The Fortress/AIG acquisition could be the start of an influx of private equity firms into the consumer credit business.
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) --

Fortress Investment's


purchase of an 80% stake in

American International Group's

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consumer lending unit could be a trendsetter.

"The time to buy for private equity is when others wouldn't want to buy it," Emanuel Cherney, a partner at the law firm Kay Scholer said in a phone interview with

The Street

. "The real art is knowing if consumer finance, or any other business, is at the bottom of the cycle."

AIG announced the agreement to sell a majority stake in the American General Finance consumer lending unit to Fortress on Tuesday. AIG will retain a 20% stake in the business and use the proceeds from the sale to pay off part of the over $100 billion is still owes the U.S. government for the 2008 bailout.

The move is especially interesting since banks such as


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Wells Fargo

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are restructuring their consumer finance businesses or scaling back. According to published reports American General Finance, which provides various types of loans to consumers, was closed out of the securitization market during the financial crisis and was unable to grow.

The value of American General was estimated to be around $2.4 billion, according to

The Wall Street Journal

. The unit has assets of about $20 billion, liabilities of approximately $18 billion and $17 billion in debt. Debt research firm


valued the transaction at $500 million in a recent note.

Mitchell L. Hollin of Philadelphia-based LLR Capital told

The Street

that the deal makes sense for Fortress. "Fortress has the mentality of buying low and selling high, and consumer subprime is about as out of favor as you can get. This is a good business and with banks getting out, it could be the time to build a new platform," he said.

CreditSights's Adam Steer said in a phone interview the the unit is in need of restructuring and speculated that Fortress may purchase a small community bank to fund American General and gain access to a bank charter to grow its deposit base. He believes a likely target could be a bank at risk at failing and speculates they might rollup several banks.

"I don't think this fixes the financing model of American General Finance. They are still lacking a deposit model for subprime securitization. They need a community bank for cheap funding," Steer said.

"I would be suspicious of that," counters LLR Capital's Hollin."Bank regulators have a lot more power these days. The number of specialty finance firms that have successfully been able to get a bank charter is very few. There is federal scrutiny they would have to manage."

Whatever the motives, market watchers expect more deals in the future. "Part of what is going on in the private equity world is that funds are feeling some pressure to start deploying money that has been committed to them from their LPs," added Kay Scholer's Cherney.

The transaction is expected to close by the end of the first quarter of 2011.


Written by Maria Woehr in New York