Sunday, February 1, 2009

On Investing in Financial Services: J. Christopher Flowers, J. C. Flowers & Co.

Some thoughts from a J. C. Flowers’ talk below, even though a little dated. He has been in the middle of events that have defined this decade, and could possibly impact this century.

Investment Strategy
J. C. Flowers has frequently executed a strategy of investing in financial services companies where the government is an important player. His theme was that government assisted deals seem to have no downside, even if there may be a capped upside, like the Shinsei Bank deal.

Investment Structure
He create a silo structure that can take 100% control of banks and that separates the acquired bank from the investing firm’s other investments. Flowers executed this by acquiring 9th smallest national bank. He has utilized this strategy to take 24% control in a German commercial real estate property lender.

Central Banks Around the World
His take on central banks- BOJ was moving slowly, Ireland may well go the way of the UK, and that the ECB has been hammered by national interest. These thoughts, seen in light of calls for a concerted global action by economists, as well as in light of efforts by Bank of Ireland to avoid directly bailing out the banks, caught your attention.

The Usual Suspects… Err… Questions.
Some questions arise:
1. How do both the investing strategy and structure account for the regulatory risk of investing in financial services companies? Could the market/ industry of the acquired player disappear? Say CDOs are regulated away? A more operational question is how do you deal with a government that is trying to force you out? That’s something that Flowers may be experiencing in Germany.
2. Given the governments may not want to continue their assistance of financial services for long, what kind of strategies would he need in place to exit with returns?
3. Regulatory capture is a separate line of thought- is that relevant here?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

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