Bird-Dogging for Billions - Harbert Management Corporation

J U N E 2 0 12
BI R
DD
G
FO O G I
R
N
BI L G
L I ON
S
RAYMOND HARBERT,
SCION OF AN ALABAMA
INDUSTRIAL DYNASTY,
HAS GENERATED STELLAR
RETURNS AS A FUND MANAGER.
SO WHY IS HE STRUGGLING
TO FIND INVESTORS?
BY JOHN HELYAR
P H OTO GRAP H BY BR E N T H U MP H REYS
Harbert, left, offered
Bear Stearns’s Luce,
right, a job after a day
of turkey hunting.
2 BLOOMBERG MARKETS Month 2012
RAYMOND HARBERT,
CHIEF EXECUTIVE OFFICER OF
BIRMINGHAM, ALABAMA–BASED
HARBERT CORP., HAD A RADICAL
PROPOSAL FOR HIS FATHER.
It was 1992, and the company that
had made his dad, John M. Harbert III,
a billionaire was eking out small profits
and was $300 million in debt. Raymond
proposed selling the core construction
business, which dated back to the company’s 1946 founding. The elder Harbert threw his son out of his office, an
associate recalls.
Raymond, who was 33 at the time,
wouldn’t be denied; he eventually persuaded his father to sell. Once the construction business was divested and
the debt extinguished, Raymond presented his father with another big idea:
shifting the family business into finance. John Harbert not only gave his
approval this time, he loaned his son
$3 million against his inheritance to
launch the investment firm Harbert
Management Corp. Father, son and
four lieutenants celebrated by draining
a bottle of Sheep Dip scotch, a whisky
that bills itself as “rich, warming, malty,
young and sprightly.”
John Harbert died three weeks after
that 1995 celebration and so didn’t live
to see the results. Harbert Management funds averaged an aggregate
11 percent return for the 16 years ended
on Dec. 31, 2010, compared with
6.1 percent for the Standard & Poor’s
500 Index, according to data supplied
by the firm to investors. Harbert’s
U.S. and European real estate funds
­enjoyed combined returns of 17 percent in 2011, according to the firm’s
­annual report. And Raymond’s first
crack at launching a hedge fund produced Harbinger Capital Partners—the
firm run by Philip Falcone, who in 2001
took seed capital of $25 million and by
mid-2008 had turned it into $26 billion
of assets.
Harbert and Falcone parted ways
in April 2009, when Falcone bought
a c­ ontrolling stake in Harbinger for
an undisclosed sum. The New York
hedge-fund manager has since fallen
on hard times; Falcone’s flagship fund
lost 47 percent in 2011, according to investors, and as of April 5 he said he was
managing just $4 billion.
To Harbert’s frustration, his assets
under management have also dropped,
to $3.1 billion in mid-April from as
much as $29 billion in 2008, despite
stellar returns. The firm manages
money in 10 asset classes, including
hedge funds, private equity and venture capital, with much of its money invested in property.
Harbert, who had $500 million of his
own money tied up in the firm at the end
of March, according to data compiled by
Bloomberg, says he’s been unable to attract more money because institutional
investors, chastened by the 2008 meltdown, are shunning smaller shops in
June 2012 BLOOMBERG MARKETS 3
f­ avor of big, name-brand firms. About
two-thirds of the money flowing into
hedge funds since 2009 has gone to
firms with $5 billion or more in assets,
according to ­Chicago-based Hedge
Fund Research Inc.
“You’re not going to get fired
for investing with a big New York
shop,” Harbert says. Even if you lose
money, he says, investors prefer that
a fund’s performance tracks its peers:
“They’re not paid to take risks; they’re
judged by how their fund does on a
relative basis.”
The clients Harbert does attract
are investing in a firm with considerable financial sophistication and
global reach. The company has offices
in London, Madrid and Paris and runs
a private-equity fund in Melbourne.
Some of Harbert’s most successful investments have been in France and in
the U.K., where he bought commercial
real estate at post-financial-crash discounts in 2009 and flipped it for quick
profits in 2010. For example, he put
$39.9 million of equity into five retail
and food warehouses north of London in June 2009 and sold them for
$72 million in November 2010.
Harbert offers clients one perquisite
they can’t get in New York. He takes
them turkey and quail shooting on his
10,000-acre (4,050-hectare) south Alabama plantation. He also can get the
best seats in the house at Auburn University football games. The Alabama
school, the alma mater of both Raymond and his father, won the NCAA Division 1 football championship for the
2010–2011 season. Raymond has made
major donations to the university, including a $5 million gift in 2007.
Harbert, now 53, isn’t a drawling tycoon in the style of family friend T. Boone
Pickens, the Oklahoma oilman. Harbert
rarely sits for interviews, though he says
he was bombarded with requests during
the Harbinger years. He has spent much
of his life wearing a professorial beard,
maintaining a low profile in Birmingham and neutra­lizing his Southern accent. “When you’re from Birmingham,
4 BLOOMBERG MARKETS June 2012
you have to work harder to convince
someone in another part of the world
they should invest with you,” says Harbert, who shaves the beard off before
hitting the road to raise money for new
investment funds.
Harbert’s anonymity stands in
sharp contrast to the celebrity of his
protege Falcone, who with his wife,
Lisa Maria, has become a figure on
AHEAD OF THE PACK
Harbert has trouble raising money despite
returns that generally beat benchmarks.
Harbert
Management
Funds
S&P
500
Index
11% 6.1%
RETURN
RETURN
ANNUALIZED RETURN JAN. 1, 1995, TO DEC. 31, 2011
HARBERT
VALUE
FUND
15%
12
9
6
3
0
–3
INCEPTION
HARBERT
EVENT
OPPORTUNITIES
FUND
2007
INCEPTION
2006
2.8%*
14.8%*
–6
THREE-YEAR AVERAGE ANNUALIZED RETURN
–9
*AS OF FEB. 29 **CLOSED SEPT. 2011
HARBERT
EMERGING
MARKETS
FUND
INCEPTION
2005**
–7.12%
HARBERT U.S. REAL ESTATE FUND IV
(16 TOTAL INVESTMENTS IN THE FUND)
INVESTMENT
R & D CENTER,
SUNNYVALE,
CALIFORNIA
SALE PRICE
$6.3 MILLION $12.8 MIL(MAY 2010) LION
(MAY 2011)
GAIN
2X
INVESTMENT
HARBERT EUROPEAN REAL ESTATE FUND II
(NINE TOTAL INVESTMENTS IN THE FUND)
FIVE U.K.
WAREHOUSES
INVESTMENT
SALE PRICE
$39.9
MILLION
(JUNE 2009)
$72 MILLION 1.84X
(NOV. 2010) INVESTMENT
Sources: Bloomberg, Harbert
GAIN
the New York social and philanthropy
scene. Falcone’s fund made $11 billion
in 2007 betting on the imminent collapse of subprime mortgages.
Harbert and Falcone were an odd
couple during the eight years in which
Harbert Management was Har­binger
Capital’s parent. Falcone, the son of
a Minnesota utility worker, became
a Harvard University hockey player,
contributed millions to charity and
bought Penthouse founder Bob Guccione’s 27-room Manhattan mansion
for $49 million after his big hedgefund coup. Harbert, who was born
into money, didn’t change his lifestyle
­after Harbinger took off. He lives in a
5,300-square-foot (490-square-­meter)
home in Mountain Brook, a Birmingham suburb, and his idea of a big weekend is bird-dogging on his hunting
reserve or staying home to cook Italian
dishes for his wife and college sweetheart, Kathryn.
People familiar with the HarbertFalcone relationship say it became
strained as it wound down and ended
in the spring of 2009. Yet, Harbert
has nothing bad to say about “Philip,”
as he calls Falcone. “I’d say 85 to 90
percent of the Harbinger experience
was positive,” Harbert says. Harbert
says he admired Falcone’s command
of detail in picking which subprimebacked securities to bet against.
“From 2001 to 2005, it was fantastic,”
he says. The Alabamian remains an
investor in Harbinger’s flagship fund,
whose main investment is in a company called LightSquared Inc., which
aims to compete with AT&T Inc. and
Verizon Communications Inc. in providing high-speed wireless Internet
service. Falcone declined to comment
for this story.
For better or worse, Falcone’s rise
put Harbert Management on the map.
“It was like winning the lottery on the
way up, and it was, if not a black eye, at
least a poke in the eye on the way
down,” says John Casey, chairman of
Casey, Quirk & Associates, a management consulting firm that has advised
BIRD-DOGGING
FOR BILLIONS
Harbert Management on how to market its funds.
Michael Luce, Harbert president and
a former Bear Stearns & Cos. managing
director, says Falcone’s success brought
Wall Street to his door. “When Harbinger was hot, money was flowing in here
like you can’t imagine,” Luce says.
“There were wire transfers where we
had a tough time figuring out who was
sending the money.”
That Harbert is now swimming
against the current is clear from the
history of his Value Fund, a long-short
hedge fund. Its returns have averaged
14.8 percent during the past three
years, according to Bloomberg data.
Yet, it had only $235 million of assets
in mid-April. Meanwhile, Harbert’s
new U.S. Real Estate Fund IV, which
aimed to raise $250 million, closed to
new investors in September with a
­total of $134.2 million. As of midApril, Harbert had yet to attract in­
vestors to new distressed-debt and
commodities hedge funds.
As a result, Harbert has trimmed its
workforce. The firm had 75 employees
in its back office when its assets peaked
in 2008; it had 55 in mid-April.
“Raymond’s performance has been
quite brilliant,” says Alan “Ace” Greenberg, the former chairman of Bear
­Stearns. “Money managers have gravitated to the big guys, who they see as
safer.” Greenberg, 84, was a friend of
Harbert’s father and helped pitch the
nascent firm to its first potential investors at the Keeneland Thoroughbred
racehorse auction center in Lexington,
Kentucky, in 1994.
On the advice of consultant Casey,
the firm is trying to raise its profile.
Harbert has shifted original partner
Charlie Miller from chief financial officer to head of distribution, where he is
leading the push to increase assets. He
hired two new marketing executives in
New York last year.
Even as he seeks outside investment,
Harbert remains committed to what he
calls the merchant-banking model, in
which he depends for profits on savvy
investments rather than fees from
­clients. To keep the firm’s interests
aligned with those of investors, he
makes sure he and his 16 partners have
skin in the game. They own about a
quarter of the assets under management in each Harbert fund. “The Roth-
leader, came by to pay his respects to
this major Republican donor.
“He could be pretty brash,” says
Pickens, who first met John while raising money for Pickens’s failed Gulf Oil
takeover attempt in 1983. When Pickens told Harbert he would have to
‘I WANTED TO START A FUND THAT LOOKED
LIKE A MERCHANT BANK, AND THAT’S
WHAT I STILL WANT,’ HARBERT SAYS.
schilds charged some fees, but they
made their big money out of putting
their own money to work,” Harbert
says. “I wanted to start a fund that
looked like a merchant bank, and that’s
what I still want.”
Until he broke away from the family
construction business, Harbert spent
his career in the shadow of his father,
one of the South’s most powerful businessmen. A 36-story office building
erected by the senior Harbert is downtown Birmingham’s second-tallest
structure, towering over his son’s
11-story office three blocks away. Raymond says his father, who fought in
World War II, parlayed $6,000 of war
bonds and troopship craps winnings
into a construction business that rode
the growth of postwar America by
building major highways, airports and
shopping malls, first in the South and
then nationally.
John Harbert later branched out
into coal mining, a business he sold to
the Standard Oil Co. in 1981 for
$400 million of stock. He became Alabama’s richest man and, upon his
death, his widow, Marguerite, now 87,
became its richest woman, according to
Bloomberg data.
“He was charming as all get-out,”
says Casey, who recalls John Harbert
holding court at the Keeneland investor presentation, during which Bob
Dole, then the U.S. Senate minority
check his schedule before committing
to making a speech in Birmingham,
Harbert said sternly, “I want you to be
here,” Pickens recalls.
Raymond says his father wanted him
to get an engineering degree and eventually take over the construction business.
He wasn’t pleased when his son instead
chose to major in business at Auburn.
After joining the family firm in 1982,
Raymond managed Harbert Corp.’s real
estate portfolio and, in 1989, led an attempt at a $500 million leveraged buyout of Birmingham Steel Corp. That deal
collapsed in February 1990, after financing for such transactions dried up.
Harbert Management got off to a slow
start, and the founder decided he needed
help. “I had the entrepreneurial spirit but
also a lot of naivete and ignorance,” Harbert says. He courted Bear Stearns’s
Luce, who had worked with him on the
attempted Birmingham Steel buyout,
­inviting him to do some wild turkey
hunting. As they relaxed after a day in
the fields, Harbert popped the question:
Would Luce become his No. 2?
Luce says he agonized for months
before accepting. The reaction of his
Bear Stearns colleagues was unanimous: “They thought I was nuts.”
What Harbert lacked in experience,
he made up for in hard work, say current and former colleagues. Harbert
scouted prospective investments for
his first European real estate fund by
June 2012 BLOOMBERG MARKETS 5
Raymond Harbert’s
father, John, right,
riding around Sweden in the back of a
van, looking at properties. Scott
O’Donnell, a fellow passenger then
working for Bankers Trust Co., was so
impressed by the Alabamian’s diligence
that he joined Harbert Management
in 2002.
“He cares about making investments,
not taking in fees,” says O’Donnell, who
is now chief of Harbert’s European real
estate operations in London. Like his
boss, he is frustrated that it’s so tough to
HARBERT’S
HOLDINGS
Bloomberg Tıps
You can use the 13F Filing Summaries (FLNG) function to see Harbert
Management’s holdings of stocks in the most recent quarter as reported
to the U.S. Securities and Exchange Commission. Type FLNG <Go> on the
Bloomberg Professional service. Tab in to the COMPANY NAME field, enter
HARBERT and press <Go>. Click on Harbert Management Corporation in
the results. For a pie chart that shows the allocation of Harbert’s portfolio to
different sectors, click on the circle to the left of Current. Type HFND <Go>
for the Hedge Fund Home Page function. JON ASMUNDSSON
attract outside investors, despite the
firm’s earning a 28 percent return on its
first European real estate fund and
15 percent on its second as of mid-April.
Harbert himself says he yearns to get
his firm back to the $5 billion asset
mark. “But if getting to a bigger size is
going to change our style of investing,
we won’t go there,” he says.
JOHN HELYAR IS AN EDITOR-AT-LARGE AT
BLOOMBERG NEWS IN ATLANTA.
JHELYAR@BLOOMBERG.NET WITH ASSISTANCE
FROM KATHERINE BURTON IN NEW YORK.
To write a letter to the editor, send an e-mail to
bloombergmag@bloomberg.net or type MAG <Go>.
Posted from Bloomberg Markets, June 2012, copyright by Bloomberg L.P. with all rights reserved.
This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity.
#C9630 Managed by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com/content.
®
About Harbert Management Corporation
HMC is an alternative asset management firm with approximately $2.7 billion in assets under management and committed capital as of May 1, 2012.
HMC serves foundations and endowments, funds of funds, pension funds, financial institutions, insurance companies, family offices and high net
worth individuals across multiple asset classes, including U.S. and European real estate, venture capital, mezzanine debt, independent power, U.S.
and Australian private equity and public securities.
Harbert Management Corporation
2100 Third Avenue North, Suite 600
Birmingham, Alabama 35203
www.harbert.net
phone: 205.987.5500
toll free: 1.877.427.2378
email: irelations@harbert.net
CROSBEY THOMLEY
loaned him $3 million
to start his investment firm.