Christopher Flowers Finds the Bloom May Be Off

This should be a great time to be Christopher Flowers.

As a private equity investor and former Goldman Sachs ( GS) investment banker, Flowers has acquired a reputation for turning around struggling banks with help from governments. And it just so happens that the Obama administration's revamped rescue plan for the banking system intends to rely on partnering with investors interested in taking a chance on troubled financial companies.

Flowers, the head of the eponymous J.C. Flowers & Co., hopes to see a future in which "low-life grave dancers like me make a tremendous fortune out of the mess," he said at a recent breakfast hosted by Source Communications.

He has already started positioning himself for the recovery, teaming up with a group of investors to buy IndyMac from the Federal Deposit Insurance Corp. for $13.9 billion. And more recently, rumors have circled that Flowers is looking at an investment in Bank of America ( BAC), which has been hounded by concerns about the adequacy of its capital reserves as the credit crisis has lingered.

But questions over the role private equity will play in the government's attempts to address the banking crisis are still being resolved, and will be critical to Flowers' future impact on the banking industry, says Rodgin Cohen, a high-powered bank merger attorney and partner at Sullivan & Cromwell.

"I think he will be quite important, relatively, because he's a guy who really understands it, focuses on it, and is very shrewd," Cohen says. "The question as to how important he will be absolutely is going to depend in large part on where the Federal Reserve is going to come out on private equity investing in banks."

Before they decide, Fed officials might want to talk with their counterparts in Japan about Long Term Credit Bank, which Flowers and a group of investors bought from the Japanese government in 2000 after it failed in 1998. LTCB, now known as Shinsei, or "new life," made Flowers a fortune and became known as one of the most successful private equity deals ever.

But Shinsei has struggled in the past two years, in part because of investments in Flowers' private equity funds, Bloomberg News pointed out in an article last week. And, according to The Wall Street Journal, Shinsei still hasn't paid back Japanese taxpayers for bailing it out in 1998. The paper says shares would need to reach 745 yen to make the government whole -- more than 800% above their Wednesday close of 81 yen.

Fed officials might also look to Europe, where the chess-playing Flowers is involved in a battle of wits with the German government over the future of Hypo Real Estate. Flowers invested $1.3 billion in Hypo in June at 22.50 euros -- an investment that now looks to be nearly worthless, with Hypo on the verge of nationalization. Flowers has said he wants to retain a stake rather than have the government buy him out.

Done Deals
Indymac
Hypo Real Estate
IndyMac
2009
Hypo Real Estate Holdings AG -2008
HSH Nordbank
Shinsei
HSH Nordbank AG
2006
Shinsei
2000 & 2008
NIBC
NIBC
2006 & 2008
 
Near Misses
Merrill Lynch
Sallie Mae
Merrill Lynch
2008
Sallie Mae
2007
Lehman Brothers
AIG
Lehman Brothers
2008
AIG
2008
Washington Mutual
Bear Stearns
Washington Mutual
2008
Bear Stearns
2008

Flowers declined to comment on either Hypo or Shinsei to TheStreet.com. But while it has been a rough year for his investments, Flowers sees tremendous opportunity amid the wreckage.

"Governments everywhere -- this government and around the world -- are going to own a lot of stuff, and they're going to be not very adroit and not very commercial as they work their way out of that," Flowers said at Source Communications breakfast. "That's what history has shown, and therefore, just like the Resolution Trust Corp. in the early '90s and buying busted banks from the FDIC and so forth, there's going to be a lot of money to be made around the edges of this crisis in corporate restructurings."

Flowers hopes, in other words, to make a lot of money at the expense of clumsy governments around the world. While this strategy has landed him on Forbes 400 list of richest Americans for three straight years, it is less clear how it has worked out for investors in his funds.

Throughout his decade-long career in private equity, Flowers' investments were up just 30% through Sept. 30, according to documents prepared for investors and recently reviewed by TheStreet.com. It is safe to assume that number is considerably lower today, given that the S&P 500 is down by more than 33% since that date.

Flowers' investments are highly concentrated. According to the investor documents (which precede the IndyMac transaction) just four banks account for roughly 80% of all the capital he has invested. In addition to Shinsei and Hypo, Flowers' other major investments are in HSH, another German bank, and NIBC, a Dutch bank. Because they are not publicly traded, they are more difficult to value. As of Sept. 30, Flowers valued NIBC at 80% of what he originally invested and HSH at 70%, according to the investor documents.

Nonetheless, Flowers has some prominent defenders, such as former Goldman Sachs Chairman John Whitehead.

" A lot of investors, in what they decide to do for the money under their direction, diversify so much that they really limit their chances of great success," Whitehead says. "Chris will place big bets on things that he believes in. I admire that quality."

Though a person close to Flowers says many of J.C. Flowers & Co.'s investors are former and current Goldman Sachs executives, Whitehead says he has never invested with the private equity firm.

There is no question, however, that Flowers' initial group of investors and backers formed an impressive group. Former AIG ( AIG) Chairman Hank Greenberg, who sat with Flowers at the breakfast panel discussion, told TheStreet.com he invested with Flowers and would do so again.

"He's very bright. He's got courage, he's got smarts. He'll play an important role in the restructuring of the financial system," Greenberg says.

Backers on Flowers' Shinsei deal included JPMorgan Chase ( JPM) CEO Jamie Dimon, who was then CEO of BankOne; Emilio Botin, Chairman of Banco Santander ( STD); former Fed Chairman Paul Volcker; former Citigroup ( C) Co-CEO John Reed; and Michael Boskind, a former top economic adviser to President George H.W. Bush.

Some invested personal money, some invested institutional money alongside Deutsche Bank ( DB), General Electric ( GE) and AIG, some agreed to take board positions at the restructured bank.

Will they come back to invest with Flowers? It may not be critical. He raised $4 billion from the Chinese government's investment arm, and he is said to have raised an additional $2 billion or so for a third fund.

Nonetheless, he is well short of a $7 billion target set in brighter times, and a person who works with Flowers describes him as "really struggling" to raise money. One private equity investor says it is a troubling conflict that several institutions Flowers controls, such as Shinsei, invest in his funds. This could not be confirmed, except in the case of Shinsei, where Flowers told Bloomberg News that despite his position on the bank's board, he recuses himself from board votes that involve his funds. He declined to discuss the issue further with TheStreet.com.

Flowers still has a relatively low profile in the U.S., and is perhaps more known for deals he hasn't done than ones he has. According to a person close to J.C. Flowers & Co., the firm has eyed investments in AIG, Washington Mutual and National City in the last 18 months, in addition to a bid it made for Bear Stearns that has been widely reported .

The firm also considered investing in Lehman Brothers on three separate occasions, before offering to buy it just prior to its bankruptcy filing in a joint bid with Bank of America that was rejected by the government. And the firm looked at Merrill several times over the year, but never made an offer.

Choosing not to bid on a financial company, or being outbid, has in general been far better than being the winning bidder over the last year. Another private equity firm, Texas Pacific Group, had a $2 billion investment in Washington Mutual sour, and Bank of America's ( BAC) purchase of Merrill Lynch has sent the Charlotte, N.C., bank into the arms of the federal government.

However, on what is probably Flowers' highest-profile near-miss, he was saved from another disastrous investment only by rejection. After getting out of an agreement to buy Sallie Mae ( SLM) for $60 a share in 2007, Flowers made a revised bid of $50 a share that would now be down by more than 80% if the student lender hadn't walked away.

These near-misses aren't totally painless for Flowers' investors, as they still end up paying related fees to accountants, lawyers and other consultants used in conducting due diligence on the deals. One prospective investor cited that wasted money as a reason for his decision not to invest with Flowers.

But the money may not all have been wasted from Flowers' perspective -- at least not in one important instance. In an unusual one-time return to his earlier career as an adviser on bank M&A, Flowers signed off on BofA 's ill-fated acquisition of Merrill Lynch in September, splitting a $20 million advisory fee with Fox-Pitt, Kelton, a boutique investment bank he recently acquired.

Two private equity investors and an investment banker suspect Flowers may have billed his investors for the work on Merrill Lynch without sharing the fee with them. That is because the work he did on Merrill initially was as a potential investor. He then switched hats, but they assume he had no arrangement with them to share advisory fee revenues, as this was an unexpected situation. Flowers declined to respond to these suspicions.

One executive who oversees private equity for a multibillion dollar institutional investment portfolio would not say whether he was invested with Flowers, though he says he knows him personally, likes and respects him, and demonstrated great familiarity with his investments.

"He's got to make sure that what he does over the next 12 to 18 months works out and works out really well," the executive said.

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