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May 12, 1997 01:00 AM

REFCO TO ACQUIRE INVESTMENT MANAGER

Paul G. Barr
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    CHICAGO - Refco Group Ltd. is negotiating to buy Forstmann Leff Associates Inc., New York, as part of an attempt to break into the institutional money management business, industry sources say.

    An announcement of a deal, estimated to be valued around $70 million by one consultant, could come soon.

    Sources said Chicago-based futures broker Refco seeks to create a multiasset class investment firm, which would combine the fixed-income expertise of recently departed fixed-income executives from UBS Asset Management (New York) Inc., with the equity-focused offerings of Forstmann Leff.

    Refco also will be seeking high-net-worth individual assets for the new company, sources said.

    Tone Grant, president of Refco, would be chairman of the new firm. Donald Phillips, former chairman of Sam Zell's institutional real estate and distressed company firm, Equity Institutional Investors, would be president, sources said. Mr. Phillips also has worked as chief investment officer with the Ameritech pension fund in Chicago.

    Mr. Phillips declined to comment on whether Forstmann Leff will fill the equity slot, except to say Refco was negotiating with three firms. He was reached at Refco's New York office.

    Refco executives declined to comment; Forstman Leff executives didn't return phone calls.

    The fixed-income professionals who joined Refco from UBS are: Dan Roberts, former managing director and head of fixed income; Michael Kimble, a former managing director; and Louis Cohen, Taylor Wagenseil and Janet Murphy, all former vice presidents at UBS.

    At UBS, the departing fixed-income team's duties will be assumed by existing staff, and the firm plans to recruit more people. Ranji Nagaswami, vice president, was named the new head of fixed income and Lawrence Kemp, vice president, was promoted to chief investment strategist and deputy chief investment officer.

    The principal owners of Forstmann Leff are: Joel B. Leff, chairman; William F. Harnisch, president and chief executive; Peter A. Lusk, chief operating officer and executive vice president; and Richard Adelaar, executive vice president, according to a recent federally filed ADV amendment.

    Mr. Harnisch owns 25% up to 50% of the firm, while each of the others owns 10% up to 25% of the firm, according to the March 27 ADV amendment.

    Forstmann Leff managed $3.4 billion in mostly equity assets as of Jan. 1, and primarily uses a large capitalization growth style.

    Industry experts say the move by Refco, known primarily for its futures brokerage business, could succeed and would make sense from a business perspective.

    Peter Starr, consultant with Cerulli Associates Inc., Boston, said Refco would probably pay $67 million to $70 million, based on recent mergers and acquisitions in the industry, and the institutional client base of Forstmann Leff.

    "It certainly seems to be a strategic move to complement their product line, (and) even out their revenue stream, Mr. Starr said.

    Nate Spain, principal with executive search firm Global Research and Recruitment, Carpentersville, Ill., said getting a person with Mr. Phillips' background to help run the firm will send the right message to the industry and open a lot of doors.

    And coupling Mr. Phillips with the fixed-income team from UBS, a "tier one" firm, is a sign that "there's someone savvy in Refco thinking this through," Mr. Spain said. He said he's not directly familiar with the situation.

    Brad Hearsh, managing director and investment banker specializing in money management firms with PaineWebber Inc. in New York, said money management would offer good diversification to the transaction-based business of a firm like Refco.

    Mr. Hearsh also said he was unaware of the deal.

    But one industry expert, who did not want to be identified and was unfamiliar with Refco's effort, said Refco's aggressive stance in the futures industry could reduce its ability to gather institutional assets.

    Refco has gained some notoriety for its ties to First Lady Hillary Rodham Clinton's lucrative cattle futures trading and for a string of fines and settlements paid to the U.S. government related to its derivatives dealings.

    In addition to its large futures brokerage business, Refco owns firms that broker cash market securities, including government securities, international equities and emerging market securities, and it deals in foreign exchange.

    Performance for UBS fixed-income separate accounts has been generally above the median manager in Pensions & Investments' Performance Evaluation Report. Core fixed-income portfolios finished in the third, fourth and second decile, respectively, among broad PIPER fixed-income accounts for the one, three and five years ended Dec. 31.

    Core-plus portfolios finished in the first decile for both the one-, and three-year periods, among broad market managers. (A five-year number wasn't available).

    Its intermediate duration composite finished in the sixth, fourth and fourth respective deciles among peers for the same periods. UBS' long-duration style finished in the sixth, sixth and third deciles for the respective one-, three-and five-year periods ended Dec. 31.

    Forstmann Leff's six equity separate account composites have had mixed results against the Standard & Poor's 500 Stock Index in recent years.

    Decile comparisons were not available because of the way Forstmann Leff composites are classified by PIPER.

    For its largest equity composite in PIPER, the "Fully Invested" composite, Forstmann Leff returned an annualized 30%, 16.4% and 13.5% for the one-, three- and five-year periods, respectively.

    In the same period, the S&P 500 returned 23%, 19.7%, and 15.2%, respectively.

    And Forstmann Leff's midcap separate account composite recently has been a top performer among all equity PIPER accounts, finishing fifth in 1996 with a return of 48.7%. The style produced returns of 22.3% and 18.1% for the three and five year periods. The Russell MidCap Index returned 19%, 16.1% and 15.8%, in the same respective periods.

    In addition to its separate account offerings, Forstmann Leff offers offshore fund management and private partnership, or hedge fund, management, according to its ADV.

    Mercedes M. Cardona contributed to this story

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