Paying Dearly for German Mistakes

Christopher Flowers mulling it over. Source: Chris Ratcliffe/Bloomberg
Christopher Flowers mulling it over.
  • Why it matters

    Why it matters

    Mr. Flowers, who specializes in investments in banks, insurers and financial services providers, is widely active in Germany and Europe.

  • Facts


    • J.C. Flowers & Co. was founded in 1998 and manages investments worldwide worth $10 billion, or €8.94 billion.
    • The private equity firm has been burned by investments in HSH Nordbank and Hypo Real Estate.
    • Mr. Flowers at age 31 became the youngest partner at Goldman Sachs in 1988.
  • Audio


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Handelsblatt: Mr. Flowers, let’s start with the “fintechs” – those young technology firms challenging traditional banks. There is intense discussion here – we have the impression that you are skeptical as to whether fintechs will be around over the long run. Is that correct?

Christopher Flowers: I actually have a more nuanced opinion here. Of course, fintechs bring new ideas, changes and improvements. But there is also hype and promises that clearly can’t be kept. And in the meantime, there are so many fintechs that it will be impossible for all of them to be successful.

Could you give us an example?

We took a look at a fintech company from the credit-card sector. To form an opinion, we then called up friends at a large credit-card company and asked, “Do you approve of what they’re doing?” And they answered, “This is a great company, we love it — but there are 200 just like it. And we like them all.” (laughs) What I want to say is that it’s hard to predict which of the 200 will survive. It’s extremely difficult to achieve an overview.

What is your strategy? Do you wait until a company has successfully established itself and then buy it?

Our focus is not on firms in the start-up phase: the risks are too great. What we are looking for are firms with genuine revenues that are making a profit. As a rule, a company with a value of €100 million is the lower limit for us.

What businesses are interesting?

One of them is the credit business. But also the traditional banking business that is being reinvented.

Aren’t some fintechs overvalued? Think of the credit platform Lending Club. Its market capitalization is around $5 billion.

In general, yes. There’s a lot of overvaluation in some parts of the fintech market.

Are fintechs a threat to traditional banks?

Not really. Perhaps fintechs react quicker today, but I doubt that they will be able to preserve this head start in the long run.

“Postbank is too big for us.”

Christopher Flowers

But many banks are refraining from issuing credit because of stricter regulation …

Exactly. That is the real reason for the upsurge of credit platforms, not the new technologies. The credit platforms, just like the fintechs, are filling the gap left by traditional banks.

You look for opportunities — would you invest in Greek banks at the moment?

Independently of the fact that Greece is not right up at the top of our list, I’ve always said that it will only be possible to invest there when it has definitely been decided whether there will be the euro or the drachma.

Are you welcome in Greece?

You have to view the issue in a wider context. Private equity always has to fight against preconceptions. But I think that, just as in other markets, we will be welcome in Greece. But I admit that ministries and authorities most often prefer for banks to be bought by banks.

You are quite enthusiastic about the Italian market. Why?

We are involved with Italian providers of financial services because the market is large and the country occupies a key position in Europe. At the same time, however, many problems must be solved here as well. That is a mix that we approve of. Already in 2013, we acquired the insurer Eurovita, and in Milan the broker Equita belongs to us.

Would Postbank be a good investment for you here in Germany.

Postbank would be too big for us.

You could do a club deal with other financial investors …

Perhaps. But at the moment, Postbank is better served on the stock market.

You had a stake in Hypo Real Estate, now Deutsche Pfandbriefbank is scheduled to be listed on the stock exchange. Are you interested?

Not really. But in any case, the company prefers a listing on the stock exchange.

Do you often think about the failure with HSH Nordbank?

We have about a 9 percent share in HSH Nordbank, and it’s true that we take a good deal of time to think about the bank.

In what direction is HSH Nordbank developing?

The bank went through rough times after the financial crisis in 2008. Its management has worked hard to improve the situation. Costs were significantly lessened, and many problematic assets were reduced as well.

Would you like to get rid of your remaining stake?

By definition, for a company like us nothing is for all eternity. If the right chance should come along, we would of course sell. But in the short term, I don’t see any change. In the long run, there might be a public offering; that would be the moment to get out. But until then, some time will certainly pass.

Do you see better opportunities in the insurance field? Consolidation hasn’t come along so far there.

In principle, insurance companies are interesting because under the catchword Solvency II, regulators force management boards to engage in judicious thought.

Where do you see the greatest opportunities in Germany?

Banks, insurance companies, fintechs — there are many good companies in Germany.

You aren’t scared off after having lost lots of money at HRE and HSH?

We paid dearly for this lesson, that’s true. But these weren’t specific “German” mistakes; they could have happened in any other country. The biggest problem was that we didn’t have any controlling majorities. In other countries such as Japan, we were also faced with great challenges, but there we could decide upon a strategy and emerged stronger from the crisis.

Did politicians get in your way?

Everywhere in the world there are banks that are not in private hands. When politicians sit on the boards, then they act in a political context; but that’s what is expected of them. They don’t think primarily in economic terms.

There is much talk of mid-sized companies and the opportunities there …

… throughout my entire professional life, I have been hearing about the opportunities with mid-sized companies, for 36 years now. But please, continue. (laughs)

Are you interested in the mid-sized bank IKB?

We are watching how things develop, as we do for all sectors in which we are involved.

Large sovereign funds are becoming increasingly active in the private equity market. Are you feeling pressure from the new competitors?

They are more investors in private equity funds than competitors.

Do the sovereign funds want to do more deals together with you?

In principle, yes. Because we have the expertise and the network for making direct investments on our own and finding lucrative investments.

Because of the low-interest phase, are you receiving more financial resources from professional investors for your funds?

Yes. But you have to distinguish between long- and short-term developments. The world’s largest Japanese pension fund GPIF, which has huge resources available, intends, for example, to invest more in stocks and private equity; that is a fundamental and long-term change of course. You see that happening with other institutional investors as well. And then there’s more the short-term, transitory search for profits. So we have both developments.

Does it put a downward pressure on profits?

I think so. But profits continue to be quite good; for example, in recent years we have achieved really good profits.

Are there excesses in the market?

Perhaps profits won’t continue to be as high, because we are already in the late phase of the most recent cycle.

Are private equity funds selling their stakes more easily at the moment because prices are so high?

That’s true. But we do both; we also want to buy. Many European and German banks are currently trading under their book value; that brings opportunities. In the USA, we sold stakes — and believe me: there isn’t a single bank there where an investment would pay off. The valuations are simply too high.

In spite of the Greece crisis, Europe is the most interesting market for you at the moment?

Definitely. There is simply a large recovery potential here. Prices are inexpensive in continental Europe; the situation is different in Great Britain.


Peter Köhler and Robert Landgraf conducted the interview. To contact them: and

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