WEST CONSHOHOCKEN, Pa. -- A new merchant bank is raising an initial $100 million in private equity capital that will be used to acquire 20% to 50% stakes in startup, early stage and management buyout investment management and financial service companies.
Rosemont Partners LLC, which was to open for business April 3, is investing in the kinds of firms founder Charles Burkhart's old company, Investment Counseling Inc., West Conshohocken, couldn't touch in its merger and acquisition practice because they were too small.
But it's these kinds of companies that present "very interesting opportunities" for private equity investors, Mr. Burkhart said.
Rosemont Partners has firm commitments for $10 million total from seven institutional and high-net-worth investors and additional future commitments of between $40 million and $50 million.
With the lure of returns Mr. Burkhart predicted will be at least 30%, Rosemont is talking with 150 institutional investors and 50 high-net-worth individuals for investment in its first fund. He is bankrolling the capital fund with some of his own money, he said.
Mr. Burkhart, founder of Investment Counseling, is taking the company's merger and acquisitions practice with him.
Joining Mr. Burkhart at Rosemont are David Silvera, managing director; John O'Shea, director; Mark Leader, analyst; and two administrative staff. Mr. Burkhart said he also will hire several chief operating officers of money management firms.
Mr. Burkhart owns the holding company for Rosemont outright, but said he will share equity in the firm with all employees.
Rosemont will share Investment Counseling's West Conshohocken offices. Mr. Burkhart will retain his ownership stake in the company and will have a seat on its management committee, but he will no longer have a role in its day-to-day operations.
Mr. Burkhart said the two businesses will be run separately to avoid potential conflicts of interests between the consulting group and the merchant bank.
The split will leave Paul David Schaeffer as the principal partner in charge of the company's strategic consulting business with a staff of 24, located mostly in the company's Mill Valley, Calif., office. Mr. Schaeffer said vendor demand for strategic consulting services is so strong he will have to hire 10 new consultants this year and might open an office in the Midwest.
About 75% of Investment Counseling's annual revenue has been from strategic consulting, rather than merger and acquisition business, said Mr. Schaeffer. All Investment Counseling staff participate in a phantom stock ownership plan.
Mr. Schaeffer said there will be "absolutely no change" in the strategic consulting offered by his firm, other than expansion of its competitive intelligence products. Enhanced delivery of publications over the Internet also is planned.
But outsiders think Investment Counseling may suffer without the charismatic Mr. Burkhart at its helm.
"Chas has access to a lot of people and a lot of resources that most other consultants don't have. Chas is really the front at IC, and his absence will impact the firm . . .," said Rick Adler, president and chief executive officer of Convergent Capital Management Inc., Chicago.
Investment Counseling isn't the first investment management M&A shop to form a merchant bank. Last year, Putnam Lovell de Guardiola & Thornton Inc. launched San Francisco Highcrest Partners LP.
Rosemont will provide "value-added" to the ownership stake it takes in a money manager by taking a very active management role, in which it will be involved in everything from a board seat to product development, distribution, technology, business planning, marketing and employee compensation structures.
Rosemont will hold onto its stakes for five to seven years, Mr. Burkhart said, at which point managers can invoke one of several exit strategies: sell a majority stake to another company; do a management buyout of Rosemont's stake in order to increase employee equity; or sell Rosemont's interest to another strategic buyer.
This hand-holding approach is likely to be relished by some new money management companies, said Ward Harris, managing director at McHenry Consulting Group, Berkeley, Calif., a vendor consultant. "Startups and early-stage managers have a real need for maturity and infrastructure experience on their boards. There is a real potential value here, to the extent that Rosemont can deliver those kind of services that aren't native to the typical money manager who goes off to start his or her own company," he said.
Added James Folwell, a consultant at Cerulli Associates Inc., Boston: "There's definitely room for more companies that will invest in money managers and provide them with advice . . ."
But one private equity consultant, Mario Giannini, president of Hamilton Lane Advisors LLC, Bala Cynwyd, Pa., has some doubts about the attractiveness to institutions of undiversified private equity funds such as Rosemont's or HighCrest's.
"One concern of many private equity investors will be the exposure that a fund investing only in money management companies will have to the capital markets," he said.
"What will happen to the investment if the markets have a very bad downturn?"
