CIVC Pulls Big Return With Subprime Mortgages –

Buying a standard mortgage company and transforming it into a provider of home loans for customers with subprime credit profiles turned into the best deal ever done by CIVC Partners, which last month exited its investment in First Franklin Financial Cos., realizing a return on equity just shy of 100%.

CIVC acquired First Franklin in 1996 from DLJ Merchant Banking Partners and began targeting customers who do not qualify for “agency” mortgages, or loans from standard mortgage programs such as Fannie Mae. These customers often have inconsistent income sources or heavy credit card debt, according to Dan Helle, a partner at CIVC. Revenue at First Franklin, based in San Jose, Calif., has grown more than 100% a year since the acquisition, to approximately $200 million in 1998. In the first half of 1999, the company had $1.8 billion in loan originations.

Although terms of CIVC’s sale of First Franklin to National City Corp., a financial services holding company, were not disclosed, the financial press has reported a valuation for the company between $80 million and $100 million.

A Growing Investment Trend

CIVC is not the only private equity firm to bet on the growth of businesses that service the subprime market-last year, Capital Z Partners acquired Ames Financial Corp., which provides home equity loans for high-risk customers. In addition, Greenwich Street Capital Partners last year bought IMC Corp., another sub-prime home equity lender (BUYOUTS Jan. 11, p. 12), and Thomas H. Lee Co. last year invested $300 million in equity in Metris Cos., which provides credit cards to consumers with less than stellar credit histories (BUYOUTS Dec. 21, 1998, p. 6).

Apollo Advisors L.P., through platform company WMC Mortgage Corp., also has begun investing in the subprime mortgage space.

Helle said the prime market for mortgages is becoming increasingly competitive, making it a tough space for financial players.

The Chicago private equity firm earlier this year received a fresh commitment of $500 million from sole limited partner Bank of America and changed its name to CIVC Partners from Continental Illinois Venture Corp. (BUYOUTS Mar. 8, 1999). Previously, CIVC received money from Bank of America on a deal-by-deal basis.