At first glance this would appear to be a promising maiden fund. New York-based Atlas Merchant Capital, founded in 2013, has secured the ultra-respectable Lazard Freres & Co LLC to market the effort, according to a Form D filed with the SEC earlier this month.
The minimum investment for outside investors listed on the Form D is $100,000, although a brochure attached to the firm’s Form ADV describes a more typical minimum of $10 million. The high bar suggests that Atlas Merchant Capital plans to target mainly institutional investors with its fundraise.
According to the Form D it is early days on the fundraise: The firm has yet to sell any interests in the fund. The firm plans to take up to the standard 20 percent profit-share after providing investors up to an 8 percent preferred return.
Notably, the firm says that “certain investors” will receive about 10 percent of the carried interest and 10 percent of revenue, including management fees – a sign that those investors are particularly important to the firm. The firm’s website lists three “senior advisors,” including former Treasury Secretary Larry Summers, but it isn’t clear if those are the “certain investors” referred to.
Key executives listed as directors and promoters on the Form D include Diamond, 63, and David Schamis, and it is their recent backgrounds that might first give investors pause. Diamond, founding partner and CEO of the firm, had previously been chief executive of London-based Barclays plc, where during a career that started in 1996 he helped build its investment bank into a leading bond underwriter. But Diamond left under a cloud in 2012 after investigations found the bank had rigged LIBOR interest rates. U.S. and U.K. regulators fined Barclays 290 million pounds ($439 million) as a result.
Diamond is also a co-founder and non-executive director at Atlas Mara Co-Nvest Ltd, a company that raised $325 million in late 2013 on the London Stock Exchange to make financial-services investments in Africa.
Before joining Atlas Merchant Capital as a founding partner about a year ago, Schamis had been a managing director at J.C. Flowers & Co, another New York buyout shop that specializes in financial services. The firm famously got sucker-punched by the financial crisis of 2008. As of Sept. 30 a $106.5 million investment in the firm’s vintage-2006 second fund, JC Flowers II, by Oregon Public Employees Retirement Fund had lost more than half its value.
Schamis had also been a director at MF Global Ltd, a brokerage led by former New Jersey Governor Jon Corzine that filed for bankruptcy in 2011. A Jan. 28 Bloomberg article about Schamis joining Atlas Merchant Capital mentions Will McDonough, previously a wealth manager at Goldman Sachs, as another founding partner at the firm. But McDonough is no longer listed on the Atlas Merchant Capital website and isn’t mentioned on the Form D – another development worth investigating by potential investors.
Diamond and Schamis did not return phone calls seeking comment by press time. Had they, they might have pointed out that the Form ADV brochure notes that “there have been no legal or disciplinary events involving either Atlas or any of its management persons that are material…” And, needless to say, the brochure has positive things to say about the principals, including that their “active and substantial participation in the financial services industry is expected to provide Atlas with advantaged deal flow.”
The firm’s strategy, as described in the brochure, is to make investments – mainly in control deals – in capital-intensive financial services companies based in the United States, Canada, Western Europe and Japan. Sectors of interest include banking, insurance, reinsurance, broker-dealers, consumer finance, housing finance and related businesses. Its portfolio may include companies at every stage of development, from investments in newly incorporated companies (though well-capitalized) to ones in public companies.
It’s a broad-ranging strategy, and according to the brochure the “flexible investment approach provides Atlas with the ability to adapt with the evolving financial services industry and to capitalize on the most attractive investment opportunities.” The firm is particularly interested in companies that are either growing or that are undervalued “due to a number of factors, including regulatory or market factors, undermanagement, and operational distress.”
Anyone who’s lived through the last six years knows at least some of the risks of investing in financial services, including its high degree of sensitivity to the strength of the economy. Neither the firm’s website or brochure dives deep into the opportunities. But they are compelling.
Michael Kasper, a managing director at investment bank Freeman & Co, a specialist in financial services, said his firm tracks more than 200 sponsors around the world that focus on financial services, including both sector specialists such as Aquiline Capital Partners and Stone Point Capital and generalists such as Blackstone Group, Carlyle Group and Kohlberg Kravis Roberts & Co. The 219 private equity shops tracked by Freeman & Co around the world sponsored $55 billion in disclosed transactions last year, up from $36.6 billion in 2013; the number of deals fell from 154 to 127.
Trends driving deal activity, said Kasper, include a big move by asset managers, public pension and other asset owners to outsource their fund administration and middle-office functions to outsourced service providers, who may need private equity-financed acquisitions to grow. Asset management is another fast-growing market, fed by strong performance and cash in-flows over the last few years. “It’s been a growing sector, and private equity capital in general has been attracted to growth sectors,” said Kasper.
Asked about Atlas Merchant Capital, Kasper said the “knowledge and experience” of the principals should serve them well in taking advantage of opportunities, particularly in sectors like banking where rising interest rates could create both winners and losers.
“If they can go out there and raise a billion-dollar fund they’ll be nicely positioned to start putting some money to work,” Kasper said.