For Deal Mak­ers, Incu­ba­tor Offers an Alter­na­tive to Wall St.

August 13, 2012

The New York Times — Deal Book
Invest­ment Bank­ing August 13, 2012, 5:16 pm

For Deal Mak­ers, Incu­ba­tor Offers an Alter­na­tive to Wall St.

Fred R. Conrad/The New York Times Adam Good­friend, left, the Alber­leen Group’s chief invest­ment offi­cer; Julie Alberti, chief oper­at­ing offi­cer; and Jolyne Caruso, chief executive.

Incu­ba­tors have long existed for tech­nol­ogy start-ups. But the needs of invest­ment bankers are not quite the same as those of tech entre­pre­neurs who started a busi­ness in a garage and spent all night pro­gram­ming code.

Jolyne Caruso, expe­ri­enced on Wall Street, took a page from the tech play­book to help sea­soned financiers run their own firms. In 2010, she cre­ated the Alber­leen Group, an incu­ba­tor for invest­ment bankers who have expe­ri­ence in their sec­tors and entre­pre­neur­ial atti­tudes but lack cap­i­tal, investor con­tacts or sup­port in areas like reg­u­la­tory compliance.

As the econ­omy remains lack­lus­ter and Wall Street keeps shed­ding jobs, Ms. Caruso is offer­ing an alter­na­tive to the large firms and the more promi­nent bou­tique invest­ment banks.

Just as Wall Street has learned from the tech indus­try to be more nim­ble, the Alber­leen Group’s team mem­bers say they set them­selves apart from other banks by pro­vid­ing more cre­ative, cus­tomized ser­vices. In addi­tion, the incu­ba­tor has been able to attract clients who are often dis­en­chanted with the higher fees, dimin­ished ser­vice and poten­tial for con­flicts of inter­est at the big banks, she said.

The big invest­ment banks con­tinue to be tough places to work — between reg­u­la­tions, the lack of cap­i­tal to fund deals and the bro­ken com­pen­sa­tion model,” Ms. Caruso said, adding that the “mis­ery fac­tor” remains high even four years after the finan­cial crisis.

Though some Wall Street bankers have started bou­tique invest­ment banks, not every­one has the invest­ment cap­i­tal or back­ing to do so. But because of the sup­port of the Alber­leen Group, which is affil­i­ated with a reg­is­tered broker-dealer, its bank­ing teams can offer clients the gamut of invest­ment bank­ing ser­vices includ­ing bond financ­ing, and advice on merg­ers and acqui­si­tions or ini­tial pub­lic offerings.

Ms. Caruso’s con­nec­tions, cul­ti­vated dur­ing 30 years on Wall Street, pro­vide an entree for the bankers, who focus on energy, real estate and middle-market deals. The Alber­leen Group’s advi­sory board mem­bers, who include E. Stan­ley O’Neal, the for­mer chief exec­u­tive of Mer­rill Lynch, are all investors in the com­pany, giv­ing them a stake in the suc­cess of its bank­ing teams.

Not every banker thrives in such an entre­pre­neur­ial set­ting. Two bankers on the real estate team left after fail­ing to gen­er­ate rev­enue in Year 2.

Ms. Caruso said bankers who do well in the incu­ba­tor set­ting must have an innate entre­pre­neur­ial flair in addi­tion to exten­sive indus­try expe­ri­ence. Those who sit back and wait for work to find them will not last long. “They need to be scrappy,” said Ms. Caruso, who spent nine years at JPMor­gan, where she was man­ag­ing direc­tor and chair­man of JPMor­gan Securities.

At the age of 32, she was brought in from Bear Stearns, where she had worked in equity sales, and was among the first out­side hires to help build the bank’s insti­tu­tional equi­ties division.

She later co-founded and was pres­i­dent of Andor Cap­i­tal Man­age­ment, a $7 bil­lion hedge fund, where she put in place func­tions like account­ing and mar­ket­ing and Secu­ri­ties and Exchange Com­mis­sion reg­is­tra­tion require­ments. And her work at Lehman Broth­ers, where she was global head of absolute return strate­gies and a mem­ber of the firm’s man­age­ment com­mit­tee, built on her expe­ri­ence (she left two years before Lehman’s collapse).

Before start­ing the Alber­leen Group, she han­dled direct deals for investors. But while rais­ing money for a solar energy trans­ac­tion, she rec­og­nized that she lacked expe­ri­ence in the energy indus­try. She sought assis­tance from Steven Casey and his part­ner E. Scott Medla, bankers at CIT Energy. She had worked with Mr. Casey on pre­vi­ous deals, and he told Ms. Caruso he planned to leave CIT, which was in bankruptcy.

It was clear that if I wanted to do what I wanted to do, I had to move on,” said Mr. Casey, who yearned for less bureau­cracy and more con­trol over his business.

It was then that Ms. Caruso real­ized that many bankers shared Mr. Casey’s frus­tra­tions. Together with Adam Good­friend, the Alber­leen Group’s chief invest­ment offi­cer, she began work on a busi­ness plan for the incu­ba­tor, which to her knowl­edge is the only such pro­gram for invest­ment banking.

Mr. Casey and Mr. Medla were Ms. Caruso’s first recruits. They now lead the Alber­leen Group’s five-person energy team and recently closed on a $180 mil­lion financ­ing pro­gram in which two util­ity com­pa­nies will sup­ply equity cap­i­tal for the con­struc­tion of solar energy projects nationwide.

Unlike bankers at bou­tique invest­ment banks, those who join the Alber­leen Group work for them­selves, not as salaried employ­ees. The Alber­leen Group sets the teams up as lim­ited lia­bil­ity com­pa­nies and pro­vides them with one year of work­ing capital.

Dur­ing the start-up years, teams reside in the Alber­leen Group’s Mid­town Man­hat­tan offices, and receive man­age­ment advice, deal dis­tri­b­u­tion and capital-raising ser­vices and broker-dealer support.

In exchange, the Alber­leen Group typ­i­cally takes one-third of each team’s rev­enue, which should gen­er­ally be about $5 mil­lion to $10 mil­lion annu­ally. In Years 2 through 5, the teams are expected to be self-sufficient with the rev­enue they generate.

At the end of the five years, the teams can either strike out on their own or become Alber­leen Group part­ners with equity in the com­pany while retain­ing their part­ner­ship in their invest­ment bank­ing team.

At the end of the day, you take your com­pany with you,” Ms. Caruso said.

Another bank­ing team leader noted that a smaller orga­ni­za­tion comes with trade-offs.

The Alber­leen Group has no enor­mous bal­ance sheet to offer clients,” said Blake Mur­phy, man­ag­ing part­ner with TAG Access Part­ners, the incubator’s team that works on mid­size deals, whom Ms. Caruso has known since her days at Bear Stearns. The team com­pen­sates in other ways, he said; for exam­ple, by find­ing investors who bring indus­try expe­ri­ence in addi­tion to capital.

Still, the Alber­leen Group is out­gunned by the Wall Street names. “This is not an incu­ba­tor that’s going to com­pete for a $50 bil­lion M.& A. deal,” said David Stow­ell, clin­i­cal pro­fes­sor of finance at Kel­logg School of Man­age­ment at North­west­ern Uni­ver­sity. Another issue, he said, is whether the incu­ba­tor will “be able to fill out its plat­form with a broad enough group of teams to cre­ate refer­rals and synergies.”

Ms. Caruso says she wants even­tu­ally to have 10 to 15 teams, includ­ing ones spe­cial­iz­ing in media/telecommunications and health care, as well as a pres­ence in Lon­don and Asia. This sum­mer, the Alber­leen Group is rais­ing a mer­chant bank­ing fund that will enable it to co-invest in clients’ deals, she said.   Fol­low Adri­ana Gardella on Twit­ter @adrianagardella

A ver­sion of this arti­cle appeared in print on 08/14/2012, on page B5 of the NewYork edi­tion with the head­line: For Deal Mak­ers, Incu­ba­tor Offers an Alter­na­tive to Wall St..