1. You started out as a banker. What path brought you to being an investor in banks?
I spent almost 20 years in bank management. In the middle of 1987, I joined Drexel Burnham Lambert to run its financial institution restructuring business. Mike Milken was under attack by Rudy Giuliani, and Drexel went out of business in 1989. There were no jobs, so I printed up some cards, started this business finding banks that are undervalued and underperforming. I went and saw people who had money and said if we could get these troubled banks back on the straight and narrow, you could earn a nice return. We started out in an environment that was very much like this one. There were a lot of banks in a lot of trouble, and I would like to think our efforts kept a lot of banks from failing. We used to have this business to ourselves. Now you’ve got dozens of people out trying to recapitalize banks.
2. I understand you’ve just closed a new fund. Tell me about that.
Fund IV, $331 million. We were very pleased; it was a very tough fundraising environment. When we started, the world was coming to an end. People were rightly concerned how much risk there was in banking. So the process got elongated. We currently have about a third of our fund invested; we have three more investments that should be announced in the coming weeks, so it’s coming along very nicely.
3. At some point, you had hoped to get as much as $500 million for this fund.
We did start out looking for that, and we would have gotten there. But at some point we decided we’ve been raising money long enough. The more time we spend raising it, the less time we have to invest it. Let’s get what we have invested, and when that happens we’ll be back in the market.
4. How do you find the banks you invest in? And is it exclusively banks?
It is exclusively banks. There are investment banks trying to raise capital for banks. Having been in this area 21 years, we just know a lot of people so we will hear things by word of mouth. Finally, banking is a data-rich business, so we are constantly doing screens of data, looking for opportunities that fit the vision of what we’re trying to do.
5. Do you work with the FDIC, to seek out troubled banks?
Not really. Our view is that we are looking for good businesses. Those companies that fail through the FDIC, their business is pretty atrophied by the time they’re taken over. When they’ve sustained losses over an extended period of time, it’s hard to keep good customers, and it’s hard to keep good employees. You end up with something that needs an enormous amount of work. It’s hard to grow a business and fix it at the same time. It’s important to understand which of those is your primary focus. We do a lot of fixing up in process and profitability improvement with the companies in our portfolio, but our goal is to have companies that are well positioned in markets that matter and put them in a position so they can begin to grow. We have a depth of experience here. We take a very strong view of our role as mentors of management. We want our management teams to be successful.
Edited for clarity