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Wednesday, Feb 1, 2023

Downturn Creates Staffing Opportunity for One Bank

Downturn Creates Staffing Opportunity for One Bank

Wall Street West

by Benjamin Mark Cole

Each down cycle in the investment banking business, especially in Los Angeles, prompts some bankers to hang out their own shingle or team up to form a boutique.

USBX Advisory Services LLC in Santa Monica, a newish investment banking shop, has started taking advantage of the downturn by picking up talent from some prestigious houses.

Last summer’s acquisition of Senior Managing Partner Brooks Dexter signaled the start of a recruiting frenzy at USBX, which has nabbed talent from the old Donaldson Lufkin & Jenrette (now Credit Suisse First Boston), Lehman Bros. and Goldman Sachs.

Recent hires include consumer products banker Pat Turpin, formerly with DLJ; Christy Lowe, once of Goldman; and Rob Schuler, from the old Robinson Humphrey (now part of Banc of America Securities).

Dexter, who banged around the local securities scene for a couple decades, putting in long stints with Lehman Bros. and J.P. Morgan, is the USBX managing director overseeing a crew of 17 professionals, many of them new to the firm.

Is there enough work for these guys? Dexter concedes it is tough, but says there is a living to be made. “I would say activity is off only 20 percent or so,” he says of the middle market the firm serves. He defines middle market as deals in the $10 million to $250 million range, and if his numbers bear out, it is a much healthier sector than overall industry statistics that suggest merger action has been cut in half since 2000.

One reason for the relative steadiness in the middle market is that many sellers are privately held businesses, and therefore not answerable to shareholders. Often, they are founders of businesses who wish to retire, or partners who no longer like each other, says Dexter. “For them, it is just time to get out.”


Private investment in public equity deals, known as PIPEs, were once something of a backwater capital-raising tool. Now, they have nearly become mainstream investment banking tools.

“In the last several years, the quality and size of PIPEs has increased, though it really was never low,” says Alex Cappello, chairman and chief executive of Cappello Group Inc. in Santa Monica.

He says his firm was just retained by a Fortune 500 company to raise between $200 million and $300 million in a PIPE. He declined to name the client.

PIPEs accounted for $12 billion in investment last year, according to the Strategic Research Institute, compared with $3 billion in 1998.

PIPEs involve a pre-negotiated sale of large blocks of stock in a publicly held company at a fixed price, usually at some discount to the market. The buyers are generally one or more large institutions. Convertible bonds are privately placed in a PIPE as well.

In one deal, Cappello raised $23 million in March for Calabasas-based children’s wear outfit Right Start Inc., to buy toy house FAO Schwarz (the combined company’s headquarters have since moved to Pennsylvania).

He contends public companies can actually raise money more cheaply through a PIPE than other mechanisms, given skittish markets. If a company publicly announces its intention to raise capital, such as issuing new bonds or stock, that can depress the stock’s price, especially in the current, choppy market. “In a PIPE, the price is established, and then the deal is announced,” says Cappello.

In some circles, PIPEs retain a sinister reputation. So-called “toxic convertible” bonds, in which a convertible bond converts into more shares if the issuer’s stock price decreases, are a form of PIPE.

If call options are written into the convertible bonds, bondholders can end up converting into a controlling stake in a company when the share price tumbles enough. Some convertible bondholders actually short a stock, spreading rumors to sink its price, then converting shares to gain control of a hapless company.

Cappello says that as the market for IPOs and secondary offerings remains flat and banks are loath to lend, PIPEs become more appealing routes to capital.

“So many of the public companies out there are orphans. They don’t know how to talk to the Street, how to talk to institutional investors, the brokerages,” he says. “Yet, at the same time, there has never been more liquidity in private equity funds than today.”

By convincing just a few institutional investors to plunk their money down, a public company can get the capital it needs. “It just makes sense to fund certain public companies with private equity, and PIPEs is a growing way to do it,” says Cappello.

New Hire

Located in the ultra-quiet burb of San Marino, Gardiner & Rauen Inc. has been plying the M & A; trade for 25 years, usually with minimal fanfare. But sometimes even merger firms merge.

So it was recently, when Gardiner & Rauen joined forces with Robert Q. Parsons Co., the investment banking outfit. Robert “Pete” Parsons has moved into the G & R; San Marino offices, the same warrens it has occupied since 1977, and will take the title of senior managing director. Mike Marevich and Bob Singh also made the move and retain their titles of managing directors.

“It just seemed we would probably work better together and serve our clients more efficiently if we worked out of the same office,” said Parsons, who has collaborated with Gardiner & Rauen on deals over the last 30 years.

The joint operation has 13 companies up for sale, ranging from $1 million in sales to $40 million.

A smaller boutique investment banking shop, G & R; is typically retained by Southern California sellers of businesses worth between $2 million and $50 million.

Economic conditions may vary, financing may tighten or loosen, but one thing has stayed the same over the past 25 years, says Rauen: “You can never tell when a deal is going to be easy or hard to finish.”

The most common monkey wrench is seller’s remorse. “They start to think they don’t want to sell, there are too many memories, or what will they do with themselves all day long,” Rauen says. In one’s own business, an owner may be a respected satrap. Once the business is sold, a seller fears he can lose his or her identity, become a nobody, even with money. Then, Rauen finds himself playing amateur psychologist, nudging the seller to cut a deal. “In the business, we call it hand-holding,” says Rauen.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at



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