The three words, boldfaced and capitalized on the front sheet of the Securities and Exchange Commission's letter to Lakefront Capital Investors Inc., look ominous: "precarious financial condition."
Called a "letter of deficiency," the SEC notice to the Dearborn, Mich., money manager was sent in 2001. The SEC sent the letter after an examination of the firm, and it notes areas of concern. For Lakefront, the letter also implicitly describes the tough path of an emerging manager trying to build a business.
But for Nathaniel E. Carter, president and chief investment officer, the letter ignores the problems of an emerging manager, in this case a minority-owned firm seeking to market its portfolio management strategy without much capital.
Mr. Carter said he relied on credit cards for much of his working capital. In early 2001, Lakefront owed $87,788 on credit cards and lines of credit, according to the SEC letter.
"Registrant's ability to function as a going concern and to adequately serve clients may be adversely affected by its current financial condition," the letter stated.
The financial situation never got out of hand, despite the SEC warning, Mr. Carter said, and Lakefront hasn't received another such letter.
"For 12 years, we've been trying to grow, and to do that, we've had to take on debt," he said. "When your revenue base isn't growing, you have to find capital."
Much of the firm's expenses were for travel to visit consultants, he said, explaining the credit card usage that concerned the SEC. "We have some debt (now), but our cash flow is sufficient to meet operations." The firm isn't in financial danger anymore, he added.
Although Lakefront remains small, managing about $30 million, the firm's business operations are more stable, he said. The large-cap value equity manager's clients include the $14 billion Ohio Bureau of Workers' Compensation, Columbus, and the $3.2 billion FirstEnergy Corp. pension fund, Akron, Ohio. But Mr. Carter said he is frustrated by his attempts to develop an institutional clientele. Mr. Carter is critical of gatekeepers — that is, consulting firms that typically do little more than put his firm in their database, never calling on a search.
Mr. Carter started his career in corporate lending at Chase Manhattan Bank in New York. He then got an MBA at Harvard University and joined the corporate finance group at Drexel Burnham Lambert Group, staying there until its demise. Then he started Lakefront, where he applies his credit skills to selecting stocks for the portfolios.
"People talk a lot about wanting greater diversity," he said. "But they don't want that. They identify a few (emerging) firms, and that's it."
"You name the consultant, I'm in the database," he added.
"If they were serious about wanting to hire minority manager firms, how come they never come out to look at our process, never recommend us, never talk to us? I was very diligent, sending our information to a universe of about 10 consultants. They never put us in a search. My feeling is they wanted to have some minority firms, women-owned firms, emerging firms in their database in case someone asks for them. But in searching, they stuck to tried and true," not calling on Lakefront. "We're a small firm with good performance that can't seem to get anybody to buy into us."
"I was spending money to meet with consultants, putting together marketing materials trying to stay afloat," he said. "But the payoff was minimal."