Reamer’s year-old firm has cash infusion, upcoming deals

NEW YORK — Norton Reamer's new baby, Asset Management Finance Corp., will celebrate its first birthday Oct. 17 with fresh infusions of capital and near-term plans to ink its first deal or two.

In a recent interview, Mr. Reamer said those deals will mark the start of a new era of finance for money management firms. AMF will provide capital in such a flexible and "non-invasive" way that the number of deals in the sector each year could double from current levels, he predicted.

Mr. Reamer said a typical deal might find AMF extending $20 million or so to a firm looking to transfer founders' equity to the next generation, lift out an investment team from a competitor or do a management buyout. In return, AMF would acquire a "revenue-sharing interest" in the firm's top-line revenues of between 5% and 25%, for a period of anywhere from seven years to 20 years — depending on criteria such as the asset classes the firm invests in and the volatility of its asset flows.

On Sept. 9, AMF bolstered its war chest with an infusion of $40 million in equity and $20 million in subordinated debt from Pacific Life Insurance Co., Newport Beach, Calif. That investment gave Pacific Life a roughly 49% stake in AMF, the same as the firm's initial backer, National Bank Financial Inc., Montreal. Mr. Reamer holds the remainder, but he said AMF has already awarded options to key employees that could boost their combined stake to 20%, should the company meet future growth targets.

The last piece of the puzzle before AMF is all cashed up and ready to go is a $150 million banking line of credit. With two "very strong capital partners" now, "it's remarkable how quickly this $150 million is coming together," Mr. Reamer said last week.

Securing that financing will give AMF $240 million to work with, when added to National Bank Financial's initial $30 million equity investment and Pacific Life's $60 million.

When AMF signs its first deal — expected early next year — it should have enough money to do 12 deals at roughly $20 million apiece, Mr. Reamer said. Getting the right mix of revenue-sharing interests is important because a key part of AMF 's plan involves securitizing those "RSIs" in order to lower its financing costs as much as possible, he said.

Those plans are crucial to AMF's success. "That's the trick to this thing," to get leverage there, said Joseph R. Ramrath, a managing director with investment bank Colchester Partners LLC, Boston, which does deals involving investment management firms. Mr. Ramrath and his partners left United Asset Management Corp., Mr. Reamer's former firm, to start Colchester in 2002.

Mr. Reamer has the right kind of capital behind him, and at $240 million in equity and bank facilities, "a fairly significant pool" to work with, but "the pressure is on at this point to get enough deals done" to allow the company to begin recycling its capital, Mr. Ramrath said.

Mr. Reamer said he expects AMF's innovative use of revenue sharing to find takers in the market much faster than his initial iteration with United Asset Management, Boston, did. The UAM model involved buying 100% of a firm's equity and then splitting the firm's revenues on an ongoing basis with the principals, with UAM typically taking 40% and the rest going to the firm. It took several years to get that "first pickle out of the jar" with UAM, Mr. Reamer said.

He noted that he and Rick Haywood, senior vice president and head of business origination at AMF, have talked with more than 90 firms since March and AMF should be able to do its first deals by January or February. "It takes time for people to understand, accept, embrace something this different," he said. But once the logjam is broken, AMF should be able to hit an initial pace of maybe eight deals a year or so, with momentum likely to build thereafter, he predicted.

Still, money management executives, consultants and investment bankers say they want to see that first pickle.

"It's an interesting concept," said Jess B. Yawitz, chief executive officer at money manager NISA Investment Advisors LLC, St. Louis. But, he added, he wondered what kind of multiples Asset Management Finance would demand on the liquidity it provides.

AMF's Mr. Haywood said the terms AMF offers will be specific to each firm, depending, among other things, on the characteristics of the asset classes in which the firm invests, its performance and history of flows and volatility. But at the end of the day, AMF will be "providing capital at a very competitive price."

Investment bankers who focus on the money management sector said Mr. Reamer may be on to something. "He's got a fascinating idea" that could prove "very, very effective," said Bruce Cameron, president of Berkshire Capital Securities LLC, a New York-based investment bank focused on the financial sector.

Chas Burkhart, chairman of Rosemont Investment Partners LLC, West Conshohocken, Pa., predicted that AMF could complement his own firm's activities in the money management sector, providing an additional source of financing to firms that Rosemont invests in, as well as a source when Rosemont is looking to exit.

AMF's owners say the firm represents another arrow in the money management quiver. Lawrence Haber, executive vice president of AMF's 49% equity owner, National Bank Financial, said, "Our view is we've expanded the range of solutions that we can offer our asset management clients." NBF also owns stakes in Putnam Lovell NBF Securities Inc., San Francisco, and private equity investor Lovell Minnick Partners LLC, Los Angeles. Both do deals with money managers.

Plus, the number of banks willing to lend to the money management sector has dwindled, said Berkshire's Mr. Cameron.

Ross K. Chapin, a managing partner with Orca Bay Partners, Seattle, a private equity firm that focuses on the money management sector, said AMF appears to be structured smartly. "Norton is a wonderful man. He knows the minds of owners, of asset management firms and what moves them. He's done a very good job of structuring something that appeals to all their motivations," both economic and non-economic.

AMF could prove to be both a competitor and a potential partner for private equity investors, Mr. Chapin said. On the cooperative side, AMF could conceivably compliment an equity investor by requiring less stringent terms for supplementary finance, from a cost and risk reward standpoint, than a bank lender might ask for, he said.

A few industry players question whether AMF will have to go public to give its owners and key executives the returns they're seeking. Mr. Reamer said there are no plans for AMF to go public; National Bank Financial's Mr. Haber said such talk is "premature."

Mr. Reamer said he expects the cash-on-cash returns for AMF to come in at between 15% and 20%. When securitization kicks in, the company's equity investors can hope for an internal rate of return of around 30%, he said.

Some observers question whether Mr. Reamer, who turned 69 recently, will have the stamina to once again sell an innovative idea to the market.

Mr. Reamer, who signed on with AMF for four years in 2003, said he's ready, willing and able: While his current commitment calls for him to lead the team until he's 72, Mr. Reamer said, "I'd be happy to do more than that if my health is good. I'd go on forever."