As 2014 wraps up, family offices continue to look to avoid paying management fees associated with private equity firms. These offices are looking to invest directly in deals, a trend that we expect to see continue in 2015. That shift bodes well for merchant banks, such as Loeb Partners Corp., which work to form close relationships with family-owned businesses to evaluate potential investments. Loeb president Jamie Kempner joined the firm from Lazard Freres' general industrials banking group, where he was a senior adviser. Kempner is no stranger to family businesses. He is a descendent of the legendary Loeb banking family, and the son of New York socialite Nan Kempner, known for her charity work, collection of couture and spending "more than I should, and less than I want."
What is the Loeb model and how is it different from other banks?
It's very similar to what Lazard Freres was when I joined more than 30 years ago. When I started, there were two facets to the business: asset management and merchant banking--giving advice to companies and looking to invest partners' capital. What we have here at Loeb is that exact model. Our asset management manages a little less than $1 billion. On the broker-dealer side, we do some family-office functions and focus on investment advisory, while our holding company makes direct private equity investments. We feel by being close to companies on the advice side, it allows us to have the greater ability to evaluate a potential investment in them as well. Managers and founders can feel comfortable, as we are not pushing for a fee right away. That's the difference in our model - it's a long-term advisory and investing approach. It usually rings well with family-owned businesses.
Describe your focus on family-owned businesses.
We're cultivating that. One of the things I've spent time doing since I've been here is cultivating other families. We have co-invested with families on a couple deals, and we are now in discussions with families on other deals. We are working with a real estate developer who had a great relationship with a family in a prior company, where that family was their primary source of capital, and he's hired us to try to find a family to replicate that type of relationship.
Why is now the right time for your model?
It's very good timing, vis-à-vis the whole family emphasis we have been talking about. There is a successful, bigger model called BDT. Byron Trott, a Goldman banker, created BDT Capital, which basically cultivates family wealth, and the bank recently raised several billion dollars for their second fund. That is interesting today because as opposed to in the past, family entities are getting tired of paying private equity fees for blind pools, and they want to invest directly. We are trying to do that on a smaller scale. We're not charging big management fees, although there might be deal-by-deal fees, but we will present a transaction that will be described and is actionable, rather than a blind pool. I also think on the advisory side, we are non-threatening. We're completely independent, we don't have capital markets or high-yield groups. We're not trying to spread fees around our firm. We feel like we're quite experienced, and that makes us a little different.
Why are family offices attracted to deal-by-deal opportunities?
There is more transparency. They know exactly how the deal is being structured, and they may have more involvement and be part of the decision-making process rather than just putting money out there and letting the transaction get done. What you're seeing is the dichotomy between bigger and lesser firms. There is always going to be demand for the Kohlberg Kravis Robert & Companies and the Blackstone Groups and the Carlyle Groups, but when it comes to the middle market, we see some firms are now having trouble raising their next fund.
What has changed about fundraising in the middle market?
The great ones are raising capital, but it used to be that everyone could raise it. Now, the middle market is really selective about who can close new funds. If you look at smaller firms that have two or three sets of funds, getting to that third or fourth fund is a little trickier.
What does all of this say about the dynamics of middle-market dealmaking?
The competition is such that everything becomes an auction. We believe the general trends are great - the M&A environment is outstanding. There is a lot of liquidity, there is a view the economy is stabilizing, and in the macro sense, there is concern around the world, but generally people are fairly confident, and that's pretty bullish for the M&A environment. The way we approach it at Loeb is different. We are trying to find options that are young enough or far enough off the beaten path that they don't result in an auction.