Investment Banking August 13, 2012, 5:16 pm
For Deal Makers, Incubator Offers an Alternative to Wall St.
By ADRIANA GARDELLA
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.
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.