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.

Securities regulators are investigating allegations Friedman Billings may have aided and abetted insider trading by some of the hedge funds that invested in the PIPE deal the firm arranged for Compudyne ( CDCY).

For Crestview, the deal with Friedman Billings is something of a coming out party. To date, the most notable transaction Crestview has been involved with was buying up some of the Puerto Rico-based cable assets of Adelphia, the bankrupt cable company. The private equity fund has maintained such a low profile that it doesn't even have its own Web site.

Crestview was co-founded by former Goldman Sachs executives Thomas Murphy and Barry Volpert. Robert Hurst, a former Goldman Sachs vice chairman, is a member of the fund's management team.

Another member of Crestview's six-member management team is Richard DeMartini, the former head of Bank of America's ( BAC) asset management group. DeMartini left Bank of America shortly after it completed its acquisition of Fleet Financial.

DeMartini's departure from Bank of America was not without controversy. The executive oversaw Bank of America's mutual fund operation, which played a starring role in the nearly three-year-old mutual funding trading scandal. Bank of America paid a $515 million penalty to settle allegations that the bank's asset management arm let the now-infamous Canary Capital Partners engage in late trading of mutual fund shares.

DeMartini, never charged by regulators with any wrongdoing, was named in some internal Bank of America emails that discussed the lender's relationship with Canary.

Canary was run by Edward Stern, whose father Leonard Stern is chairman of Hartz Mountain Industries, a major New York area developer. In an odd twist, Crestview's offices are located on the 10th floor of a fashionable building Hartz Mountain owns at 667 Madison Ave. in Manhattan.

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