On Wall Street, there are times it pays to be one-dimensional, and times when it pays to be flexible. In the 1990s, for example, sticking resolutely to tech or blue chip stocks beat just about any other investment scheme, no matter how fancy.
Times change, of course. In the current choppy market, it's hard to decipher a direction. Is debt better than equity, or are old-fashioned REITs more worthy than venture plays? When the currents get shifty, that's when the go-with-the-flow style of investing sometimes tacks ahead. The troops at boutique finance house Tennenbaum & Co. LLC the Westside shop founded by former veteran Bear Stearns & Co. executive Michael Tennenbaum are definitely in the flexible camp.
Of late, with the $750 million they have under management, Tennenbaum & Co. has taken equity positions in enterprises needing growth capital, or it has bought senior debt from other lenders who got cold feet when a borrower hiccuped. Industry doesn't matter, and Tennenbaum & Co. is willing to tread in quickly, especially if angels are backing out.
"We are not a large bureaucracy," said Mark Holdsworth, partner at Tennenbaum & Co. "We do our due diligence, but we can do it quickly. And once we do it, we can commit usually $20 million to $30 million, but we can arrange up to $100 million." (Tennenbaum has good relations with insurance giant Massachusetts Mutual, and the insurers will sometimes match Tennenbaum's investment in a venture.)
A recent example of Tennenbaum's fleet feet was its acquisition of a 20 percent stake in Newport Beach-based Water Pik Technologies Inc., the maker of the dental tool and other water-squirting equipment, such as showerheads. The company was recently spun off from Allegheny Technologies Inc.
As a publicly held small-cap company, Water Pik needed to raise equity for expansion, finance a lower-cost manufacturing plant and help bring a new product line on the market. But with Wall Street gun shy when it came to initial or even secondary public offerings, how to raise equity was a question. In addition, Water Pik was required to issue new equities as a result of certain IRS regulations.
Tennenbaum was willing to invest $15 million for a 20 percent stake in Water Pik a bargain price: a mere 3.5 times what bankers call "EBITDA," that wretched acronym for earnings before interest, taxes, depreciation and amortization.
In general, a solid small-cap company might have sold for five to seven times EBITDA in the flush days of the late 1990s. Water Pik looked cheap, by that standard. "At 3.5 times EBITDA, we thought it was a terrific value," said Holdsworth, who holds degrees from Caltech and Harvard. Tennenbaum signed a one-year standstill agreement and can acquire more Water Pik stock in the future.
You might think that investment bankers, with their penchant for long office hours, pin-stripes and wing-tips, would be averse to betting on fashion trends, but Tennenbaum & Co. recently snapped up $20 million of corporate IOUs issued by Tommy Hilfiger Inc., the Hong Kong-based fashion house.
Hilfiger's rags went out of style in 2000, hurting cash flow. But Tennenbaum & Co. looked at the bonds, and liked them. "They were pari passu (equal in claim) with the banks," explained David Sacherman, a Tennenbaum partner. Additionally, Hilfiger had cash in the bank equal to its debt and a new line of "back-to-basics" clothing that Sacherman liked.
Result Tennenbaum & Co. bought the Hilfiger debt at 72 cents on the dollar, but it now trades at close to par.
"It's an opportunistic market," said Sacherman.Fight the Fed
"Don't fight the Fed" is an admonition as old as the Federal Reserve Board, and an investment shibboleth probably more true in the Chairman Alan Greenspan era than ever before.
But don't tell that to William "Bill" Mason, Pepperdine finance professor and money manager with Cullen Fortier Asset Management in Woodland Hills. "We are not out of the woods," said Mason last week. "Wall Street wants to believe all the bad news is over... but we will soon see another wave of disappointing earnings reports and downward revisions."
The fundamentals are against the Street right now, said Mason. The economy is slowing, and that will hurt earnings, while market average price-earnings ratios are still remarkably high. Toss in earnings-sapping energy prices, and you will likely see the summer bear, said Mason.
"I am sure Greenspan will cut rates again," said Mason. "But wait until rolling blackouts hit New York this summer. That might change the mood a little."Getting a Grip
The late 1990s were a frenzied era, in which venture capitalists often felt if they didn't commit in the morning, they would be dumped forever by afternoon. "(Today,) there is no sense of urgency to make investments," said Steven Dietz, partner with GRP, a low-profile venture outfit in Century City. "But it is a good time to look. Valuations (business prices) are being set very reasonably."
Dietz added that chasing after the latest hot field say, energy investments is not the way to play the venture game anymore.
GRP's history has been in retailing and distribution, and its partners were early backers of such concepts as Starbucks Corp. and Costco Wholesale Corp. Today GRP manages $650 million in two funds, and has about 40 portfolio companies, although not all are active investments. GRP typically takes board seats on companies in which it invests.
In the late 1990s, GRP did go into the Net, but usually when there was a retailing or distribution angle. However, GRP has traditionally been somewhat risk-averse, preferring to back ventures in the second round of financing or later, which is generally when a company is finding its sea legs. GRP also has been known as a patient investor, willing to wait the five to seven years often needed for a venture investment to mature. Currently, GRP is high on Romeoville, Ill.-based ULTA Salon, Cosmetics and Fragrance Inc., a one-stop store for beauty and cosmetic shoppers, with 80 locations and a Web presence.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by Bloomberg Press. He can be reached at firstname.lastname@example.org.
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