JC Flowers’ Big Plans Leave Some Investors With Big Questions

Mar.05, 2008 in Market Outlook

J.C. Flowers & Co. LLC expects to begin marketing its third buyout fund later
this year, according to several of the firm’s investors.

The firm has told at least two large investors that J.C. Flowers III LP will
likely include a core fund targeting roughly the same amount it raised for its $7
billion predecessor, as well as a parallel fund about which the firm is
negotiating with the China Investment Corp. CIC’s investment in that fund is
expected to be between $3 billion and $4 billion.

Operating Partner Ed Grebow declined to comment on the firm’s plans for its next
fund.

With such large fund-raising plans, the firm can expect to field some tough
questions from some of its backers, particularly over the size of its senior
investment team.

(This story also appeared in LBO Wire, a newsletter published by Dow Jones & Co.)

“Compared to other firms with $10 billion or $11 billion funds, they run a pretty
lean team,” said an investment officer at one institutional investor that backed
J.C. Flowers II LP, which closed in 2006.

J.C. Flowers has 13 senior financial service specialists on its senior team,
according to its Web site, although the investment officer said that the number
of professionals at the senior partner level is much smaller than that.

Another Fund II backer said that other than founder Christopher Flowers, the firm
has at least four managing directors on its team, as well as at least three
operating partners. The managing directors include Ravi Sinha, Sally Rocker,
David Schamis and John Oros.

J.C. Flowers still has a lot of dry powder left in Fund II after terminating its
$25 billion bid for student lender SLM Corp. (SLM). As of June 30, 2007, it had
called a little more than $24 million of a $100 million commitment to Fund II
from the Oregon State Treasury, according to the treasury’s Web site.

Other Fund II backers include AIG Investments, Adams Street Partners LLC, Goldman
Sachs Private Equity Group, Glenmede Trust, the New York State Teachers’
Retirement System, the Teachers’ Retirement System of the State of Illinois,
TIAA-CREF, and the University of Virginia Investment Management Co.

However, a third investor said that the firm has other deals in the pipeline,
including plans to raise its stake in Japan’s Shinsei Bank Ltd. (SKLKY), which
could push it much closer to the point where it could begin marketing a new
offering.

As of October 2007, J.C. Flowers had invested in a half-dozen deals through Fund
II, according to the firm’s Web site. They include investments in Hamburg bank
HSH Nordbank AG, the retirement services and insurance divisions of the Bisys
Group Inc., and a smaller investment in the Boston-based Kessler Group, which
focuses on marketing initiatives and portfolio acquisitions in the credit card
industry.

J.C. Flowers focuses on buyouts and turnarounds of companies in the financial
services industry and raised $900 million for its first institutional fund in
2002. In addition to its New York headquarters, the firm has offices in London,
Hamburg and Beijing.

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