WALL STREET WEST–Global Giant Having Hard Time Handling Local Deals


Southern California has emerged as one of the nation’s hottest finance markets, as evidenced by the decision of Ken Moelis, corporate finance chieftain at Donaldson Lufkin & Jenrette Securities Corp., to retool his Westside office to focus on tech companies “within 100 miles of Century City.”

In essence, Moelis directed his staff of 120 bankers to take far fewer plane trips and start thinking like venture capitalists.

So it was a surprise last week to learn that Dutch finance giant ING Barings has been effectively shut down in L.A. as an investment banking force.

Until recently, ING had 12 investment bankers here and the talk was about growth, not retrenchment. With capable bankers and the ability to sell products worldwide (called “distribution,” in Wall Street-ese) ING seemed a power in the making.

Instead, word now is that ING’s downtown L.A. shop is virtually deserted. Managing director Mark Vidergauz has gone to the newly formed Sage Group LLC in West Los Angeles, joined there by former associates Brien Rowe and Daniel Gardenswartz.

Additionally, Bruce Pompan, former vice president at ING, has joined Gerard Klauer Mattison, the New York-based brokerage that’s expanding in West L.A.

“There might be one banker left” with ING downtown, Pompan said last week in a brief interview. In even more terse language Vidergauz indicated that the downtown office is staffed “by no one.”

ING Barings itself did not return phone calls last week.

Several former ING bankers spoke of the bad fit between ING and Los Angeles. As Moelis has seen and reacted to, the Southern California market has become entrepreneurial and regional.

Fortune 500 companies are not here. The action and plenty of it is in private equity, M & A; and venture banking. Depending on the market, you might even get an IPO or two.

But ING Barings is a global giant, looking for mega-deals of intercontinental scope. L.A. isn’t that kind of town anymore if it ever was. Additionally, one has to have the authority to green-light a deal locally. Calling home for permission doesn’t work when rival financiers are tossing around cash on the scene and lining up connected backers for promising companies.

Speaking of connected backers, Vidergauz has lined up some heavy hitters to underwrite Sage Group. The “founding investors” include Westminister LLC, which is Robert Addison Day Jr., who founded Trust Co. of the West, the $55 billion money fund in downtown Los Angeles. Other backers are Brad Freeman, the well-known LBO financier of Freeman Spogli & Co. in West Los Angeles, and Rockwell Schnabel, former deputy secretary of the U.S. Department of Commerce and general partner at the $650 million venture fund Trident Capital. Incidentally, all three backers are known for their Republican Party affiliations.

The Sage Group will target middle-market and emerging growth companies.

Municipal Bond Mania

A hot investment right now in California are double tax-free municipal bonds, according to Mary Beth Syal, managing director and muni maven with Payden & Rygel, the downtown L.A.-based money manager with $30 billion in assets.

One reason is that so many Californians, in the generous economy of the past five years, have moved into the federal government’s upper tax bracket of 39.6 percent, which starts with an income of about $285,000 a year. Add to that the state tax bite of 5.6 percent (after deductions), and a double-tax-free muni begins to look interesting.

Though a California general obligation bond offers only 6.15 percent, that’s still the equivalent of a taxable bond offering 10.95 percent, said Syal. “Only junk bonds are offering those kinds of (effective) yields,” she said.

The demand for municipal bonds is so strong that even those with an element of risk seem to be doing well.

For example, the Los Angeles Department of Water and Power will move into a deregulated environment in fiscal 2003 (starting July 1, 2002). Yet DWP bonds (also double tax-free) are selling today at just 10 or 15 basis points above state general obligation bonds.

Investors who want to do some muni bond research can check out the state Web site, www.treasurer.ca.gov, and read up on pending and recent bond issues.

Or, Syal points out, anybody with $5,000 can invest in Payden & Rygel’s mutual fund devoted to double-tax-free state and local bonds.

The Marrone Call

It was January 2000, and the St. Louis Rams had just conked the Tennessee Titans. It seemed every commercial during the Super Bowl showcase telecast was for a dot-com outfit, an online discount broker, or a mainstream stock brokerage.

Hairy-chested arguments about “tastes great” vs. “less filling” were banished to the video archives.

The plethora of investment ads were red flags for John Marrone, West Los Angeles branch manager with brokerage-investment banking house Roth Capital Partners (formerly Cruttenden Roth).

“Man, I probably shouldn’t say this,” Marrone said at the time. “If this isn’t a contrary indicator then I don’t know what is. Wall Street takes over halftime at the Super Bowl. They should call the (game’s) two-minute warning “Two Minutes for Dean Witter.”

Just what was Marrone’s reasoning for such bearishness? Whenever “everybody” hops on or off a bandwagon, then it’s probably time to do the opposite, from an investment viewpoint.

As evidence, Marrone recalled the infamous August 1979 cover of Business Week bearing the headline, “The Death of Equities?” It summed up a miserable decade on Wall Street, and was something of a consensus sentiment.

But it turned out that issue was the mother of all “buy” signals.

Since the last Super Bowl, Marrone’s Y2K fears have been shakily validated. As of last week, all the major indices were down on the year, including the Nasdaq by double digits.

Whither now Wall Street? Marrone is still expecting the correction to continue for awhile.

“We have had a non-stop bull market since the Persian Gulf War (nine years ago),” he said. “We are seeing a correction, but it is only a correction, not a catastrophe.”

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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