Muller & Monroe Cultivates Emerging Managers

You won’t find a Muller or a Monroe at Muller & Monroe Asset Management, a Chicago-based fund of funds firm that takes pride in finding and funding top-notch niche and emerging private equity firms.

You will, however, find André Rice and Irwin Loud III, two individuals who came together in 1999 after several people mentioned Loud’s name when Rice, the firm’s founder and president, was searching for a chief investment officer. At the time, Loud was in charge of private equity at the Florida State Board of Administration, which manages the state’s pension funds. There, he helped launch the first program that focused exclusively on private equity co-investments. He was also among the first to see opportunity in the difficulties that many smaller private equity firms faced when they tried to raise money from big pension funds like his.

While working for Florida’s pension system, Loud set out to organize a pool of money earmarked for niche and smaller managers. But soon, Florida began turning away from new bets on long-term asset classes like private equity, a factor that ultimately contributed to Loud’s decision to join Rice and try something more entrepreneurial. The next challenge, Loud realized, was to convince his wife to swap Florida’s sunshine for the winters of Chicago. Reluctantly, she did.

In their initial conversations, Loud convinced Rice that the unmet needs of next-generation funds flowed in two directions. Not only did these firms find it difficult to raise capital, but there were large investors, including big pension funds, that were eager to diversify their private equity holdings beyond the Blackstones and Apollos of the world. One of the issues that held back these big pension funds was that they didn’t have the time or the resources to sift through or do due diligence on the hundreds of small and niche private equity firms that came knocking. Enter Muller & Monroe, or M², as the firm is now informally called.

The name Muller & Monroe actually came from two streets: Muller Street in St. Matthews, S.C., where Rice was raised, and Monroe Street in Streator, Ill., where the late Terry Mulvihill, Rice’s mentor at Goldman Sachs and a Muller & Monroe investor, grew up. While Rice, an African-American who grew up in the segregated South, had a very different background from that of Mulvihill, who came from an Irish family in the Midwest, the pair decided to named their new firm after the streets they grew up on as a way to honor their two-decade mentorship and friendship.

Now in its 12th year, Muller & Monroe has $458 million in assets managed in separate accounts and co-mingled funds of funds. And the firm has big plans to expand. Before the year is out, said Rice, the firm plans to start raising two new funds, including a third fund of funds that will have a $300 million to $400 million target, plus a new co-investment fund that will target $200 million. Already, the firm has had preliminary discussions with existing clients about the new funds. To meet its new goals, the firm plans to expand its staff to 16 people from its current 11.

Rice said the firm’s new fund of funds will invest in 12 to 15 low-to-mid-market buyout firms, which he said will constitute the core of the fund’s investments. It will also invest around 15 percent of its assets in mezzanine funds and “a little” in early stage venture. The firm will take about two years to build out the fund’s portfolio, he said.

Muller & Monroe typically backs buyout funds that are between $100 million and $400 million in size. Among the benefits of investing in smaller funds, said Loud, is that they don’t have to buy portfolio companies at auction. The firm also has an easier time aligning interests with those of smaller GPs. In addition, the firm is eager to expand to fast-growing overseas markets. Rice is particularly enthusiastic about Turkey, which has seen China-like growth rates of between 9 and 11 percent during the past two years.

The “emerging managers” specialty (a phrase both Rice and Loud dislike) remains an important part of the firm’s profile and portfolio. But Rice was quick to emphasize that the firm is not focused exclusively on women and minority-owned private equity firms. “Often people are more comfortable doing business with people who look like them,” said Rice. “We’re comfortable with whoever is sitting there.”

An executive from one of Muller & Monroe’s LPs, who was not authorized to speak on the record, said he respected the firm’s “investment acumen.” Evaluating women and minority managers, he said, is a very different task than assessing more established managers, but because Muller & Monroe has deep experience in this area, “we’ve been very happy with the people they’ve brought to us. They seem to be much more creative than some of the other firms we’ve seen.”

Muller & Monroe has invested in 26 firms, having sifted through 700 GPs that have come to its attention. “We want to be early money in firms that are doing it right,” said Loud.

Rice said that the first fund, which raised $144 million, had “mixed results.” He attributed that in part to the fund’s mandate, which was restrictive due to the relatively limited pool of women and minority-owned funds that happened be in fundraising mode. The firm’s second fund, however, which closed in 2007 after having raised $95 million, didn’t have built-in restrictions and came back with what Rice called “really terrific returns.”

Overall, said Loud, the private equity environment is quite strong right now, but his greatest fear is that something could change that dynamic. Memories are still fresh, he said, from the firm’s first three years, which included the dot-com crash, the recession that followed and the attacks on 9-11, all of which dramatically slowed the fundraising environment.

But fundraising eventually picked up. Among the LPs that have invested in Muller & Monroe are some of the investors that Loud predicted would be interested in the firm’s focus. In March 2011, for instance, the $141 billion New York State Common Retirement Fund put the firm in charge of overseeing a $200 million allocation for its broader emerging manager private equity program. Muller & Monroe also has substantial commitments from the Connecticut Retirement Plans and Trust Funds.

Above all, Muller & Monroe emphasizes its due diligence process to prospective investors. “You’ve got to get it right on the front end,” said Loud, who added that he sees about 150 firms a year and spends at least two months on due diligence for a new firm before writing a check.

Once a commitment to a new manager has been made, the oversight by Muller & Monroe of the firm’s portfolio investments remains active. “We don’t meddle, but we want to be awake at the wheel,” Loud said. “Everything is about managing risk.”

Rice said the firm’s due diligence process goes well beyond the numbers, and includes a great deal of reputational vetting through the firm’s extensive network of contacts. The two are eager to make sure that prospective managers have the personality and leadership traits that they believe are essential for being a good fund manager. Primary among those, Rice said, is honesty.

Trust is a paramount concern in light of pay-to-play activities that recently plagued clients of one of Muller & Monroe’s competitors. Aldus Equity Partners, which once managed New York Common’s emerging manager program, was at the core of New York’s and New Mexico’s recent pay-to-play scandals. Besides casting a shadow over outsourced private equity managers, the scandal ultimately resulted in a prison sentence for New York’s former comptroller, Alan Hevesi. For all practical purposes, Aldus no longer exists.

Despite that episode, the “emerging manager” specialty is expanding. Muller & Monroe has several competitors, among them North Carolina-based Parish Capital, which has about $2 billion under management, and Connecticut-based Fairview Capital, which has more than $3 billion under management. In addition, Credit Suisse and Bank of America have recently developed emerging manager specialties.

With Muller & Monroe’s two new funds, the firm could see itself managing more than $1 billion in fee-producing assets. But Rice sees the firm going well beyond that. In five years, he reckoned, he would like to see Muller & Monroe expand beyond its emerging manager focus into other areas that will help grow its asset base to “multiple billions” of dollars.

If it’s able to meet these goals, it will have long passed its earlier status as an emerging manager itself.