Flowers Hands Back Most of $3.2 Billion China Investment Unspent

  • China Investment Corp. made commitment amid financial crisis.
  • J.C. Flowers had just 18 months to buy troubled banks.

On the eve of the credit crunch, J. Christopher Flowers received $3.2 billion from China’s newly formed sovereign wealth fund to invest in distressed financial companies. Seven years later, his firm disclosed that the bulk of the money never got invested.

J.C. Flowers & Co., a New York-based private equity firm that specializes in financial institutions, in a June filing adjusted its gross assets under management to $8.5 billion from $11.1 billion. The $2.6 billion decrease primarily reflects the firm’s view that it won’t be using the remaining commitment it received from China Investment Corp. in 2008, according to a person familiar with the matter who requested anonymity because the fund is private.

The inability to deploy such a large chunk of investor capital is unusual because private equity firms typically only raise money if they’re confident they can invest it. CIC gave J.C. Flowers only 18 months to make investments, said the person familiar with the situation, far less than the three to five years that private equity funds typically have. The short window may have hampered J.C. Flowers because the government was initially reluctant to allow firms to buy distressed banks during the financial crisis.

‘Buyer’s Market’

“It was looking like a hell of a buyer’s market” in late 2007 and early 2008, said Michael McCormack, executive director of Z-Ben Advisors, a Shanghai-based firm that consults on investment management opportunities in China. “It just didn’t turn out to be one.”

A CIC representative declined to comment, as did Jennifer Hurson, a spokeswoman for J.C. Flowers at Owen Blicksilver Public Relations.

Flowers, a co-founder of the financial institutions merger group at Goldman Sachs Group Inc., was once ranked as one of Wall Street’s top dealmakers when it came to banks. His fortunes turned during the financial crisis, when he made several money-losing bets. He is currently trying to persuade clients to extend the life of a $7 billion buyout fund raised in 2006 to give existing investments more time to become profitable. He is also in the early stages of raising the firm’s next private equity fund.

CIC made its commitment to a partnership called Financial Service Opportunities LP, which was created specifically for the Chinese investor in January 2008. It received additional amounts of about $400 million each from J.C. Flowers and a third party, according to two people familiar with the situation and regulatory filings.

Most funds raised around the same time to buy financial companies managed to invest their money. There were 59 buyout funds started between 2007 and 2009 that specialized in financial services deals, according to data compiled by Bloomberg. Of the combined $35.4 billion that these funds raised, some $2.1 billion, or about 6 percent, remains unspent.

AIG, MF Global

Flowers sought to invest in some of the largest casualties of the crisis during 2008, including Bear Stearns Cos. and American International Group Inc., but neither effort panned out. Some of the deals that J.C. Flowers did complete during the crisis blew up, including an investment in Hypo Real Estate Holding AG, once Germany’s second-biggest commercial property lender, and another in MF Global Holdings Ltd. The MF Global investment included money from CIC’s fund, according to regulatory filings.

The short window may have initially hampered J.C. Flowers. That’s because, up until September 2008, the U.S. Federal Reserve had restrictions in place that had made it difficult for private equity firms to buy into distressed banks, said H. Rodgin Cohen, who works with financial institutions as the senior chairman of law firm Sullivan & Cromwell. Moreover, private investors had trouble competing with government programs to bail out failed institutions and shore up healthy ones, said Tom Bernhardt, a senior vice president at TorreyCove Capital Partners, a San Diego-based firm that advises institutions on their private equity investments.

“You had these government programs that were pumping capital into the banks, whether they needed it or not,” said Bernhardt. “And you had the Federal Reserve keeping liquidity so cheap and available, the private sector distressed play didn’t develop like everyone expected.”

J.C. Flowers did have several successful investments during the crisis, notably as part of a larger group that agreed to buy IndyMac Bank from the Federal Deposit Insurance Corp. in 2009. The investment group, which also included John Paulson and George Soros, later renamed the company OneWest Bank FSB and sold it to CIT Group Inc. earlier this year for more than $3 billion in cash and stock.

After the 18-month investment window expired, J.C. Flowers continued to include the CIC fund’s unused capital commitments in its reported regulatory assets because the firm could still deploy the money to increase existing stakes or pay for related expenses, the person familiar with the situation said. Because the fund has now cashed in most of its investments, and can no longer add to those that remain, J.C. Flowers revised its regulatory assets “to exclude the unpaid capital commitments” for Financial Service Opportunities, according to the filing with the U.S. Securities and Exchange Commission, dated June 9.

Financial Service Opportunities had $2.95 billion of assets and commitments before the revision, according to prior SEC filings. Eliminating $2.6 billion of capital commitments from that figure suggests that the private fund currently holds about $350 million of assets.

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