Private Equity Legend Enters the ARM Industry – Big Time

"He's a genius, he really is," said a CEO of an insurance company that counted Flowers as its largest shareholder in a 2005 Reuters article.  Flowers and his firm have gained a reputation for complicated deals that involve turning around financial companies with large debt loads.  Some of the past successes include Japanese bank Shinsei Bank and U.S. insurer Crump Group.  As a quantifiable hat-tip to his Midas-like touch, Flowers’s initial buyout fund when he launched his company in 1999 raised $1 billion; for his next round, he will be raising $8 billion.

It is still yet to be seen what Flowers will be doing with the Sallie Mae debt collection business.  There has already been speculation in the financial press about what will become of Arrow Financial, General Revenue Corp., and Pioneer Credit in the post-buyout corporate structure at Sallie Mae.  Although, in fairness, the article linked above was written before the news of J.C. Flowers’s involvement with Encore Capital, which may change the equation.

With a 25 percent stake in Encore -- and a seat on its Board -- and a controlling interest in Sallie Mae’s 76 percent stake in Arrow Financial, J.C. Flowers finds itself controlling a significant share of the debt purchasing market in the U.S.  Could J.C. Flowers’s interest in Encore be directly related to its interest in Sallie Mae?  Perhaps.  Creating a little synergy in the student loan giant’s ARM process would certainly help up its value, the real goal of any private equity investment.  Since Sallie Mae can’t exactly sell bad student loans to itself through Arrow, it helps to have an external purchaser for some of that debt.   Could J.C. Flowers be planning to divest the collection business from Sallie Mae to other private equity or major industry players like OSI or NCO?  Maybe.  Turnaround specialists do tend to shed units and concentrate on core business.

Of course, it will be interesting to see what happens, and it’s still a little early for speculation.  First, the Sallie Mae deal needs to be completed.  After that, it could take a while to see what the ARM industry’s newest private equity player will do.  But it still remains intriguing that such a Wall Street force has set his eyes on the ARM industry.