It had to happen: a tech-oriented fund in Los Angeles looking to take positions in or buy distressed companies at a discount.
The two things that Los Angeles financiers do best fund high-tech ventures and take on troubled financial situations come together in the new Beverly Hills-based Brighton Venture Partners Inc. fund, started by L.A. money veteran Marshall Geller.
The fund may be new, but the 61-year-old Geller has been banging around L.A. financial circles since before Beatlemania, spending 21 years with Bear, Stearns & Co. (He started there in 1967 as a senior managing director and rose up to run most of the firm's banking offices west of New York City.)
Since 1991, Geller has been more or less merchant banking under his own shingle, and now is chairman, CEO of Geller & Friend Capital Partners Inc.
Geller plans to point his new $100 million fund at tech companies that are too small to warrant review by the big brokerages, and that also need capital or, more likely, some serious restructuring to get to the next stage of growth.
"A lot of tech companies are finding they can't get that second or third round of financing," said Geller. "They are going to have to merge with other companies, or possibly (consider) management leveraged buyouts as another possible scenario."
Geller will be looking for situations to invest from $5 million to $20 million in either debt or equity (or both), but he will look at smaller deals if the situation is attractive enough.
In the process, an old tool of financiers, the management LBO, may come back in favor. "We may incentivize management by buying a company in concert with them," Geller said.
Under U.S. tax code since last year, companies can no longer simply lower a stock option price for employees without incurring tax liabilities. Thus, getting employees charged up might be better accomplished by making them owners right away, rather than in the future.
Though having long soldiered in the finance wars, Geller has kept abreast of technology and, notably, acted as angel investor and early-stage merchant banker for Santa Monica-based iMall.com, which was gobbled up last year by Excite@home for $518 million.
"When iMall was bought, it had revenues of $2 million a year. I don't think that deal would get done today, quite frankly," said Geller.
(Richard Rosenblatt, iMall founder, is an investor in the new Geller fund.)
Geller also owns an 11 percent stake in City of Industry-based Strouds Inc., the linen retailer with 86 stores and a growing Web presence, and he sits on Strouds' board.
Interestingly, Geller is a native, having grown up in the Sunland-Tujunga section of Los Angeles and attending public schools as well as Los Angeles City College and Cal State Los Angeles. Geller was recently named Distinguished Alumnus of the Year by Cal State L.A.'s business school.
Echoing some of the sentiments of financier Marshall Geller is Ken Baronsky, lawyer and partner at Milbank Tweed Hadley & McCloy in downtown Los Angeles.
Baronsky has made his living in the financial niches of junk bonds and tech financing, and both segments are slow right now in terms of new issues or fundings.
"The high-yield market has retreated... and the pendulum has swung back on the Net companies," Baronsky conceded last week.
Time to hit the beach?
"Well, actually we are busy. There are private placements (private equity infusions into Net companies), and a lot of mergers. Lawyers adapt to the times," he said.
Like many other observers, Baronsky is anticipating wave after wave of consolidation to hit the new-media sector from the dot-coms, to the Web service firms, to the infrastructure giants. That means M & A; work for lawyers as well as accountants and tech bankers.
"A lot of VC guys are figuring out how to deal with their portfolio companies," said Baronsky. "It's not about getting the next round of financing. It's about merging companies that still have cash with those that don't."
Even tech companies with good business plans are not necessarily getting financed in the current pessimistic climate. As a result, they may seek partners with the financial muscle to bring plans to fruition.
Still, the overall economy is strong, and with the expanding M & A; work, Milbank Tweed, like other top L.A. firms, is searching for talent, particularly lateral transfers of seasoned lawyers from other firms or companies. In another sign of the times, Baronsky said he has seen a few of the departed return to the fold.
"Several attorneys have gone the dot-com route and are looking to return home," he said. "Hopefully, they are coming back with an appreciation of what lawyers do."
Which is make money in good times and bad?
"Like I said, we adapt," said Baronsky.
For generations, pension funds have bought office buildings, collected rent, and hoped for appreciation. But like real estate investment trusts, pension funds are now deciding it is time to treat buildings like revenue centers, said Alfred DeLeo, lawyer and finance expert with Century City-based Cox, Castle & Nicholson LLP.
"I am seeing more interest from the pension funds to run the services connected to an office building, not just contract them out," said DeLeo.
Of course, the biggie right now is who gets to cable-up an office building for telecom and broadband services. Office building owners can wire their own buildings, and then charge for access to the pipes. But there are other businesses too such as parking, dining, cleaning, delivery and personal services that are being reviewed for profit.
REITs are doing much the same thing but moving a little more slowly, said DeLeo.
Richard Smith, who ran the venture capital arm of insurer SunAmerica in Century City, is going over to Palomar Ventures in Santa Monica, to work with Jim Gauer...
Houlihan Lokey Howard & Zukin, the Century City-based finance house, engineered the sale of Santa Monica-based Zymed Inc., a leading provider of cardiac analysis software, to Big Board giant Agilent Technologies Inc. It's another example of a higher-valued public company acquiring a private company.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at firstname.lastname@example.org.
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