Hard to Lure Funding When Tech Pros Don’t Like L.A.

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How can Los Angeles wrest the title of venture capital center away from Palo Alto?

Quality of life the transportation system, schools, environment, parks, urban ambiance is a big factor, said George Abe, new partner with Santa Monica-based Palomar Ventures venture capital fund, and former manager of business development with San Jose-based Cisco Systems Inc., the computer networker.

“I think that (quality of life) is one reason the San Francisco area has done so well in the venture capital field,” said Abe, referring the Bay Area’s transit system (BART), and more activist municipal governments. “They have tried to preserve the quality of life.”

In today’s world, the primary regional economic asset is smart and motivated people. If they don’t want to live in Los Angeles, then the region won’t be able to attract “the engineers, the managers who know how to take a company through an IPO,” said Abe. “When I interview people (for jobs here), they complain about the traffic.”

The good news is that Los Angeles is endowed with many engineers and technicians, a welcome side-benefit of the region’s sprawling if declining aerospace industry, said Abe.

Another key piece of the jigsaw puzzle is excellent universities, such as UCLA and Caltech, to continue the flow of talent into the local economy.

“I spend as much time on the campus (of UCLA) as possible,” Abe said. He is prospecting for commercial ideas, and finding some, he said but there should be more. Though perhaps not “politically popular,” Abe advocates higher levels of funding for the public university, especially in the sciences.

“The whole research area has been undernourished,” he said. “There should be a lot more basic research, and the university also needs to better capitalize (profit from) ideas that are generated on campus, so taxpayers can benefit.”

Still, Abe expects the increase in Los Angeles venture capital activities to continue for at least two more years, to suffer an eventual shakeout a some point, but to ultimately settle at a permanently higher, if varying, level in the future.

Investors, managers, schools all have learned about venture capital, and have embedded venture or entrepreneurial concepts into their way of thinking.

“At UCLA’s Anderson School there are now programs in venture and entrepreneurship,” said Abe. “They weren’t there five years ago.”

Abe also authored the recently published book “Residential Broadband,” a study of the evolving mix of cable TV, digital subscriber lines and the Web.

Palomar runs an $80 million fund now, and Abe said another fund is in the works, “but I don’t know how large it will be.”

Investment Chief on Board

Beverly Hills-based City National Bank is bullish on money managing, and recently snagged Richard Weiss, 40, formerly of Sanwa Bank California, to be its chief investment officer. Weiss is the senior stock picker for $4 billion of dough handled by City National Investment, the investment arm of the bank.

CNB recently re-jiggered its common trust activities (money management for bank clients) into registered mutual funds, so that investors who are not bank clients can also hand money over to Weiss for deployment on Wall Street.

Weiss, with three months in at City National, has upgraded its computer and quantitative analysis abilities, enabling it to study and screen a larger number of stocks. Weiss is also hiring, and has 21 researchers on board now.

“We now have the ability to screen on a much broader and more frequent basis, to winnow stocks down to the few dozen or hundred that we want to invest in.”

So with all the action, is Weiss optimistic?

“I think the market is marginally overvalued,” said Weiss, citing the possibility of higher interest rates and inflation. “We have moving our accounts to sectors such as natural resources or energy that may benefit from this point in the economic cycle. It’s time to be very selective.”

European Discoveries

Where is the European economy and stock market headed? Think United States about 10 years ago, says Chris Orndorff, managing principal with Los Angeles-based money manager Payden & Rygel.

“There are three big themes when thinking about Europe,” said Orndorff. “First, European investors are just beginning to discover the stock market, much like American investors did about 10 or 15 years ago. The mutual funds there are growing, in the nascent stages.”

Secondly, European companies, run for generations with socialist governments and laws in mind, are embracing the American reverence for profits, to better fit into the global economy.

And thirdly, starting up a new company is in vogue now in the Old World. “Just in the last three years, we are seeing a boom in entrepreneurial and venture capital activities,” said Orndorff.

There is cause for Orndorff’s heady optimism, given recent results. Payden & Rygel’s European Aggressive Growth Fund (traded under the ticker symbol PEAGX) returned 64.2 percent in its first six months in operation (July 1 through Dec. 31, 1999), the money manager reported last week.

And last month, through Jan. 21, it added on another 16.9 percent return. In general, the fund run in Frankfurt by Metzler-Payden, a joint venture between Payden and Metzler Bank, a German private investment bank invests primarily in small- and medium-cap companies. These are the companies that most reflect “an enormous unleashing of profit potential” and which are still somewhat unrecognized by investors, said Orndorff.

But Europe, as an investment, has pretty much fizzled in the 1990s, along with the Far East. Why bet on what has been a long-term loser?

“You shouldn’t extrapolate from past trends,” said Orndorff. “Ten years ago Japan looked great, and people extrapolated forward from that.” But past was not prologue, at least for investors in the 1990s.

Payden & Rygel, started 17 years ago, now has $29 billion under management, running 25 mutual funds, and handling institutional accounts.

Contributing Columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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