Report: Flowers launches fund for bank investment

The head of JC Flowers has reportedly established a fund under his personal control – a possible solution to stringent US bank holding company regulations.

Christopher Flowers, chairman of financial services-focused private equity firm JC Flowers, has reportedly launched a fund in his own name to skirt US federal regulations regarding investment in banks.

The fund’s formation will allow Flowers as an individual to acquire a controlling stake in a financial institution, according to the Financial Times. As an entity separate from the firm JC Flowers, the Flowers vehicle will be able to register as a bank holding company without having an adverse affect on JC Flowers and its portfolio companies.

Banks have become highly attractive targets for private equity firms as they struggle due to credit market dislocation. Weakened asset valuations have caused many of these institutions to be badly in need of capital.

JC Flowers has been among the most active investors in the sector although the firm has largely remained limited to investments overseas. In addition to upping its stake in Japan’s Shinsei Bank, the firm has also taken stakes in Germany’s Landesbank and Hypo Real Estate.

Deals in the US banking sector have been highly limited to date by the Bank Holding Company Act of 1956. The Act requires banks to register with the Federal Reserve Board and prohibits them from engaging in non-bank activities. The rules stipulate that any institution that seeks to exercise control over banks must also register as a bank holding company, a problem for diversified private equity funds. Control is defined as anywhere north of 10 percent. A stake of greater than 25 percent is considered “absolute”.

Additionally, the regulations do not allow a private equity fund to set up an affiliate of the main limited partnership for investment purposes but require a separate general partnership to be set up in order to avoid impacting the rest of the firm.

In July, Stuart Stein, a partner at Washington DC-based law firm Hogan & Hartson, told sister publication Private Equity International: “The last nine months to a year has certainly seen more private equity interaction than previously, that’s for sure. My expectation is that through 2008 you will see a lot more interest in financial institutions from private equity firms.”

Stein told PEI that only the establishment of an entity separate from the GP that controls the main private equity firm would prevent “every holder in the chain of ownership [from being] deemed a bank holding company” in the event of a significant bank investment.