Wall Street has not treated Imperial Credit Industries gently in the past three years, with the Torrance-based finance house's stock falling from nearly $25 in late 1997 to under $4 in trading last week.
The short story is that business lender Imperial Credit, a 1993 spin-off of Imperial Bancorp, stubbed its toe in the late 1990s by moving into consumer finance, including sub-prime auto lending. Problem was, too many auto buyers welshed on their bills, leading to losses in 1998 and 1999.
"Defaults were higher than expected," conceded Wayne Snavely, chief executive of Imperial Credit. "But we are out of that business now."
Imperial Credit has also retreated from the consumer mortgage lending business and gone back to its basics loaning money to small- and medium-sized businesses in Southern California, usually collateralized by assets or receivables.
In addition, Snavely's company has been buying back (retiring) its own debt and its own stock in an effort to generate some pizzazz on Wall Street. "We are de-leveraging our balance sheet, and we have bought back 15 percent of our stock," Snavely said.
Still, not everything Imperial Credit does is plain-vanilla lending. It recently formed a Small Business Investment Corporation (often referred to as SBIC and pronounced like "civic" but with a "b"). Through this vehicle, it will both lend and take equity positions or warrants in Southern California companies a sort of merchant banking.
Imperial Credit has been lending and taking warrants on a limited basis already, but Snavely said that activity will grow with the SBIC. In addition, Imperial Credit also owns Beverly Hills-based Imperial Capital Group, an investment banking shop.
Will Wall Street respond favorably to the restructured Imperial Credit? One observer said it will take time. Not only must Imperial Credit start posting earnings, but the Street has to start trusting the company again. Imperial Credit has hinted before that there was light at the end of the tunnel, only to see more losses darken the perception of investors.
Imperial Credit posted a net loss of $16.9 million (51 cents per diluted share) for the first quarter ended March 31, compared with net income of $6.8 million (18 cents) in the year-earlier quarter. Snavely did not want to project any future earnings, but he did note that analysts are expecting profits to start again in the current quarter, and to run at about 20 cents for each quarter of this year, and then 25 cents a quarter next year. "If that holds, you can buy us (today) at three-and-a-half times (next year's) earnings," Snavely said.
By way of comparison, the S & P; 500 index has been bouncing around 30 times earnings in recent years.
One institutional investor, Omaha-based Wallace Weitz & Co., has placed a huge bet on Imperial Credit, accumulating a 27 percent stake in the common stock outstanding. "He's the other 'W' investor in Omaha," Snavely joked, referring to Wallace Weitz, with Warren Buffett being the other. "And he (Weitz) is just as highly regarded."
Timid souls rarely become venture capitalists, so maybe it's no surprise to learn that David Nazarian, chief investment officer with Beverly Hills-based Smart Technology Ventures, has formed his third venture fund, right in the face of the Internet IPO meltdown.
"If anything, it's a good time," Nazarian said. "The crazy valuations have disappeared. People are back to investing on the fundamentals, not because of the stock market,"
Nazarian's new fund will attempt to put to work $175 million in capital over the next three years, mostly in Southern California, in $2 million to $7 millions chunks.
At the heart of the strategy of Nazarian and his comrade-in-financial-arms, Joel Balbein, managing director of the new fund, is a firm belief that within five years, most homes and businesses in the United States (and many elsewhere in the developed world) will be wired for broadband service, meaning fast downloads from the Web.
As a result, Internet use will rise even more. Additionally, some believe Web use may even be "metered" meaning that users will pay varying rates to their service provider, depending on the time of day they go online and the capacity they need. For example, a guy watching a movie at 1 p.m. (when loads are heavy) will pay much more per minute than someone sending a text e-mail at midnight. (Think of your phone bills for an idea about what the future may hold.)
So Nazarian and Balbein are targeting startups that make products or services that fit into the paradigm of heavier-volume, metered Web use. Like many other local VCs, Nazarian and Balbein say their new investments will mostly target Southern California Web infrastructure and telecom firms, in which they and other Smart Technology partners can play a role in business planning and talent acquisition.
Getting in early will also be a goal of Smart Technology. "The big appreciation seems to be between round A (the first major slug of capital after angel money) and round B (the second slug)," said Nazarian.
Obviously, Nazarian is eyeing round A.
Locked in Place
James Montgomery, founder and partner at Santa Monica-based Digital Coast Partners, is halfway through gutting an old Cal Fed branch at Wilshire Boulevard and Second Street that will serve as the home of his new Digital Coast Ventures LLC business development shop, which has $40 million in funding.
"Don't use the 'i' word," Montgomery said a joking reference to "incubator," a word that has recently become passe.
Last week, Montgomery also disclosed that he has hired Tom Heymann, former chief executive of New York-based GT Interactive Software Inc., to head Digital Coast Ventures.
Heymann is known locally as the former head of Disney Stores Inc., the retailing unit of Walt Disney Co.
Heymann should feel secure in his new job. "That new conference room will be in the old vault (of the Cal Fed branch)," he said. "We are leaving the door in place."
By the way, the IPO market may have cooled lately, but a company that Montgomery co-founded, Sunnyvale-based iBEAM Broadcasting Inc., which carries video signals by satellite for ISPs, went public during the first week of this month and its shares have doubled from $12 when issued to around $24 as of last week.
"It's now a nearly $3 billion market-cap company," said Montgomery. "It will only take a few of those to make Digital Coast Ventures worth it."
Or even just one.
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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