Carlyle in $75m financial services PIPE

The buyout giant is betting that its investment in publicly listed wealth management company Boston Private fares better than similar financial sector PIPES.

The Carlyle Group has purchased a $75 million stake in publicly listed wealth management company Boston Private, which, like many of its peers, has fallen on lean times and is looking to private equity for liquidity.

Carlyle will buy two series of non-voting preferred stock at $5.52 per share, the average closing price of Boston Private common stock for the week of 7 July. That price represents a 16 percent discount on the stock’s closing price 21 July, the day before the deal was announced.

Boston Private was trading at $7.16 at press time.

“In these challenging economic times, we have looked at many investment opportunities in the financial services sector and have seen few that we have found as attractive,” Randy Quarles, managing director of Carlyle’s financial services unit, said in a statement. “We are attracted to Boston Private’s strong history of growth and their diversified business structure.”

The first series of preferred stock will be mandatorily converted into common stock following a shareholder meeting expected to be held later this year, while the second series of contingent convertible preferred stock must be approved by shareholders before it can be converted to common shares.

For every five shares of common stock issuable upon its conversion of preferred stock, Carlyle will receive warrants to purchase two shares of Boston Private common stock at a price of $6.62. If all Carlyle preferred stock is converted and warrants exercised, Carlyle will own just less than 25 percent of Boston Private.

The Carlyle capital infusion is part of a broader Boston Private plan to generate $185 million in fresh equity as it attempts to recover from a dismal first quarter. The company has announced plans to issue an additional $85 million in common stock and reduce its dividend in an effort to shore up capital reserves.

The Massachusetts-based financial services company consists of a network of independently operated affiliates throughout the US that offer private banking, wealth advisory and other management services to high-net worth individuals, business and institutions.

Hurt by a slowdown in its Southern California branches, the company reported a net income loss of $9.84 million for the first quarter of this year. In June, Merrill Lynch downgraded its rating of the company from “neutral” to “underperform”.

So far, the recent spate of private equity investments in quoted financial services companies have not fared well. Warburg Pincus and TPG have watched their respective investments in bond insurer MBIA and US bank Washington Mutual plummet as the public markets continue to retreat from the financial sector.  Combined, both firms have lost more than $1.5 billion.

Carlyle’s stake in Boston Private is significantly smaller than those taken by Warburg Pincus and TPG in their PIPES. As a condition of the deal, Carlyle will appoint banking veteran John Morton to Boston Private’s board of directors.

Carlyle declined to comment beyond its statement.