Private Equity Fund to Invest in Aames

Capital Z Financial Services Fund II, a private equity fund, said Wednesday it has agreed to pay as much as $100 million to take a controlling stake in Los Angeles-based Aames Financial Corp., a home equity lender.

Aames, which bundles loans and sells them to investors, was hurt this year as falling currencies in emerging markets and Russia’s default led investors to flee high-risk bonds for safer U.S. Treasury bonds.

Aames Chief Executive Cary H. Thompson said the Capital Z investment will give it needed capital. In November, Aames said its fiscal first-quarter earnings fell 97% and that it would stop selling its loans as securities as funding for mortgage lenders dried up. Aames also eliminated its quarterly dividend and said it expects to report a loss in the quarter ending Dec. 31. Aames had been paying dividends steadily since 1993.

With Capital Z, “we are now in a position to begin focusing our energy on improving the efficiency of our operations and enhancing profitable growth,” said Neil B. Kornswiet, Aames’ president and co-chairman.

Capital Z said it will pay $75 million for newly issued convertible preferred stock, giving it a 57.2% stake in Aames. It may invest as much as $25 million more for a total stake of 76.3%, depending on how many preferred shares current stockholders buy in an offering tied to the agreement. The fund agreed to buy any unsold shares.

The $1.8-billion Capital Z fund is managed by Capital Z Partners, an investment venture whose founders include Lawrence Cheng and Steven M. Gluckstern, former executives of Zurich Financial Services Group. Gluckstern is also part-owner of the New York Islanders hockey team. The fund’s stake will give it the right to elect four of Aames’ nine directors and to nominate a fifth.

“We believe that Aames will be one of the leading long-term participants in the sub-prime home equity markets,” Gluckstern said in a statement.

The Aames agreement parallels last month’s decision by Tampa, Fla.-based IMC Mortgage Co., which also deals in sub-prime second mortgages, to let Greenwich Street Capital Partners take 95% control of the company in exchange for capital and credit needed to pay off existing loans.

In April, Aames sold a 9.9% stake to financier Ronald Perelman and thrift executive Gerald Ford for $38 million.

The announcement was made after markets closed Wednesday.

Aames shares fell from a high of $8 in September to a low of $1 on Oct. 8. On Wednesday, they rose for the fourth consecutive day, gaining 25 cents to close at $2.50 on the New York Stock Exchange. Year-to-date, the shares are down 81%.

A Times staff writer contributed to this report.