Fairview Capital Partners was getting ready to face its greatest competitive challenge — and $640 million was on the line.
For years, co-founders JoAnn Price, 55, and Laurence Morse, 53, had concerns about financial behemoths such as Credit Suisse First Boston and AIG attempting to take over their private equity niche: emerging markets. The duo was forced to figure out inventive ways to diversify their Farmington, Connecticut-based firm. “We brought in partners who had broader networks because in this marketplace, it’s about relationships and deep access to resources,” says Price.
The co-founders knew exactly where to look for this type of intellectual horsepower. When the company was started in 1994, Bigler Investment Management Co. (BIMC), one of the nation’s premier fund of funds investment companies at the time, came on as an investor. In 1999, after Fairview severed all ties with the firm, Price and Morse recruited Bigler’s former president and chief investment officer Hanse Halligan and portfolio manager Matthew Schaefer to run Fairview Venture Management, a division designed to invest solely in top-tier general-market funds. The move would turn out to be an act of sheer brilliance.
In early 2004, Price and Morse discovered an opportunity to replace The Crossroads Group, one of the biggest private equity firms in the country, as manager of Connecticut’s state-sponsored Constitution Liquidating Fund. Entering the bidding process would place Fairview, which managed $900 million in capital, against the likes of Credit Suisse, with its $5 billion in private equity funds, and AIG, with more than $15 billion of capital under management. Could Fairview compete against these Goliaths?
To win the business, Price and Morse would have to make their case before Connecticut State Treasurer Denise Nappier and her advisory committee. Their presentation would have to be sharkskin tight since they were trying to convince the state that Fairview was the best firm to invest millions of dollars of public employees’ retirement funds. In two separate presentations, Price and Morse spent hours discussing the firm’s successful decade-long track record, reviewing their experienced management team, and explaining their investment philosophy. After weighing the merits of all of the firms, the committee came back with its decision. Fairview had won the business.
How was it able to beat the big boys?
“They won that assignment for $640 million because they came in No. 1 in the competitive process. The firm has had extensive experience especially as it relates to top-tier venture funds,” says Nappier. “Two of the partners at Fairview were responsible for the investment of the Constitution Fund [during its inception].” So Price and Morse had planted the seeds for their victory years ago when they hired Halligan and Schaefer, who initially raised capital for the vehicle as BIMC fund managers. Nappier was also impressed when she conducted an on-site visit to evaluate Fairview’s back-office operation and interview its employees. It didn’t hurt that Fairview also works with a lot of other similar funds.
Nappier’s decision proved to be a smart one. Since its inception, Constitution has been one of the state’s top-performing private equity funds. “We’ve achieved 20.7% net [investment return],” exclaims Nappier. Connecticut has since invested another $200 million with the firm to launch Constitution Fund II.
In one strategic move, the financiers boosted their capital under management by more than 77%. By December 2004, Fairview had nine funds and capital under management of $1.6 billion — a feat unsurpassed by any other BE private equity firm or many majority firms, for that matter. According to the National Venture Capital Association, a large private equity fund manages between $500 million and $1 billion in capital.
This crowning moment represents the culmination of years of planning, hard work, and solid investment performance. Price and Morse have propelled Fairview from a small firm to a major player in the $300 billion private equity arena. For this, Fairview Capital has been named the 2005 BLACK ENTERPRISE Financial Company of the Year.
A CLASS OF THEIR OWN
To fathom the significance of Fairview’s achievement, you have to understand the private equity business. Firms raise money from public and private pension funds, corporations, wealthy individuals, and endowments to finance a fund that, in turn, invests in privately held companies, ranging from startups to established entities. In this arrangement, the firm usually serves as the fund’s general partner while investors hold limited partner status. The fund receives healthy profit participation and reaps even greater proceeds during the exit stage of the investment when a company is usually acquired by a larger corporation or goes public.
What makes Fairview Capital unique among private equity firms is that it operates as a fund of funds. It doesn’t directly invest in startups or established companies but allocates investment dollars to other venture capital funds and private equity firms. Fairview is one of 150 such firms in the nation and is one of only four that invest primarily in emerging markets, which are classified by ethnicity, gender, or sectors, like technology, with potential to generate huge returns. In fact, Fairview was one of the first private equity firms to create a fund of funds focused on ethnically diverse and underserved markets. To date, Fairview has committed $350 million to this area and has capital invested in seven BE private equity firms, including Opportunity Capital Partners (No. 7 with $135 million in capital under management), Provender Capital (No. 6 with $145 million in capital), and ICV Capital Partners (No. 8 with $130 million in capital). Fairview’s portfolios, typically capitalized at $300 million, reflect a range of industries including technology, communications, healthcare, and life sciences.
“When putting the Fairview Capital concept together, we felt that to get traction with institutional investors and pension funds, it was very important to build credibility,” explains Price. “We felt we needed to have a strategic relationship so when we went to the market we could say we had a well-known partner. We approached several existing fund of fund firms, and Bigler was the one interested in being a part of this new venture.”
In 1994, Fairview Capital set up shop in BIMC’s Farmington, Connecticut, headquarters. The founders arranged for Fairview Capital to remain 100% black-owned despite BIMC’s substantial investment in the firm’s first $92 million fund (Bigler held a 30% ownership in the fund). When BIMC was sold to The Crossroads Group in 1996, Fairview continued to rent office space for three years. By 1999, Fairview moved into its own two-story brick office building nearby. “It was not a challenge to raise the second fund without Bigler,” says Price. “It could have been, but Bigler really shared a lot of information willingly, from their operating systems to their way of doing business to their vendors.”
OPPOSITES ATTRACT CAPITAL
Just about everyone, including Morse, will tell you that the private equity business is a relationship business. “People have to like you,” he says. At the same time, however, investors have to trust their fund managers to make serious investment decisions. That balance is what makes Morse and Price such a great match. “Larry and I have a lot of complementary qualities,” says Price, who is known for her sense of humor and people skills. “Larry is very thoughtful but he is also very serious and straightforward.”
Morse, who built his reputation on a strong academic foundation, is considered one of the best minds in private equity. He graduated summa cum laude and Phi Beta Kappa from Howard University with a degree in economics after spending his junior year
at The London School of Economics and Political Science as a Luard Scholar. He also earned a master’s degree and a doctorate in economics from Princeton University and served as a postdoctoral fellow at Harvard University. “I left Howard thinking I wanted an academic career in economics,” recalls Morse, who decided to switch his career orientation to what he termed the “solution side” while in graduate school. “During the 1970s while I was at Princeton, the unemployment rate for black males between [the ages of] 18 and 24 was 60% in Harlem and Chicago. That was incredibly depressing.”
Morse viewed entrepreneurship as the answer. “I saw that wealth creation is necessary and at the core of that is to create profitable businesses,” he says. “My larger concerns brought me to this playing field, but on this playing field I’m operating a business.”
It’s this focused, pensive persona — and his 11-year career as a venture capital professional — that drew Price to Morse as a business partner. His experiences working for large venture capital outfits such as UNC Ventures, Equico Capital, and Stamford, Connecticut-based TSG Ventures, the former BE private equity firm he co-founded, gave him sterling credentials. As a part of UNC’s team, Morse was involved in financing revolutionary enterprises such as CAV Systems, which developed advanced CAD/CAM industrial design systems; Air Atlanta, the first black-owned airline; Xinix, a computer chip design firm; and Accent Hair Care Salons, a chain of upscale, m
all-operated boutiques. And when SYNCOM (No. 3 on the BE PRIVATE EQUITY list with $250 million in capital under management) led additional rounds of investments in Radio One (No. 10 on the BE INDUSTRIAL/SERVICE 100 with sales of $363.98 million), Morse was instrumental in persuading Equico to participate in those investments.Although Morse and Price are both Howard alums, their paths didn’t cross until the 1980s, when they both became active with venture capital in the minority investment industry. Price, considered the godmother of private equity, is credited with linking pension funds and other institutional investors with minority businesses.
Always the activist, Price was immersed in politics before she became a financier. After graduating from Howard, she worked on Capitol Hill as a legislative assistant for Sen. Richard Schweiker (R-Pa). While working for her home-state senator, she handled issues related to small business and minority enterprise and economic development.
In 1977, the then 27-year-old Price left politics to work in a similar capacity for the National Association of Minority Enterprise Small Business Investment Companies (MESBICs), which later became the National Association of Investment Companies (NAIC). The organization, developed years earlier through President Richard Nixon’s Black Capitalism program, sought to stimulate the flow of private equity capital and loans to minority small businesses. Through Price’s efforts, it became the premier trade association for investment companies dedicated to providing financial resources for ethnic business owners. In fact, MESBIC financing was responsible for providing capital to large numbers of BE 100S companies in the 1970s. By 1983, Price became president of NAIC and, under her leadership, she steered private equity member firms to diversify their resources for investment capital. “In the 1970s, the firms were getting capital from corporations and individuals but they were not accessing large pools of institutional capital,” recalls Price, who identified public and private pension funds as a new class of investors and connected them to past BE 100S companies like Reginald Lewis’ TLC Group and Essence Communications.
In Price’s 11th year as president, she met with a group of NAIC members and came up with the idea of a private equity fund that would finance other funds: Fairview. “We had a committee and once they decided it should be a fund of funds, they asked me to be the general partner,” recalls Price. For such an ambitious undertaking, the visionary Price needed to shoulder part of the load with a nuts-and-bolts money manager.
Enter Morse. “We are here primarily to make money. If we lose sight of that then we don’t make the best business decisions,” Morse says. Price concedes that “Larry has helped me to develop that [mindset], and conversely I have helped him with a few things.”
FOCUSING ON UNDERSERVED MARKETS
On a chilly March day, the dynamic duo prepares to review yet another investment opportunity. Through a conference room’s panoramic glass wall are four black men dressed in dark suits. The men are SYNCOM founder Terry Jones and his partners. This small cadre of financiers just flew in for a few hours from their Silver Spring, Maryland, office to present Morse and Price with an opportunity to invest in their new fund, SYNCOM V.
Although Fairview is a sole limited partner in SYNCOM III and one of many investors in SYNCOM IV, this is not a done deal. Fairview has already invested more than $40 million in SYNCOM. “It’s not that simple,” maintains Price. “There is a lot of due diligence we still have to do before we can make a decision.”
Fairview’s partners will have to engage in lengthy discussions with SYNCOM’s portfolio managers and review specific sectors to be held by the new vehicle. (Traditionally, SYNCOM has invested in minority-owned media and communication businesses.) Up-front research is critical in determining a profitable return on investment since it is customary that a fund’s limited partners don’t weigh heavily on investment decisions once capital is committed. Fairview, however, will probably hold a seat or two on the advisory board, as it has with the other SYNCOM funds. “Were it not for Larry and JoAnn’s impact, many [private equity] firms would not have gotten over the hurdles that this business presents. They have advised, coached, counseled, and invested in the broadcloth of the minority-focused private equity industry,” says Robert Greene, current NAIC president.
“Focusing on underserved markets is a benefit of working at Fairview Capital,” maintains partner Ed Shirley, who joined the firm in 1998 and initiated investments in black-owned Smith Whiley & Co. (No. 4 on the BE PRIVATE EQUITY list with $222 million in capital under management).
Shirley was also brought on to head a direct investment program, an option Fairview offers investors, but it hasn’t become popular. “I was to invest directly in companies alongside funds,” says Shirley. For instance, the Fairview Capital II fund invested in three operating firms between 1999 and 2000: a cable television system serving West Philadelphia; a New York-based radio station operator; and a New York-based textbook publisher. “Two did well and one didn’t.”
Although the companies were not in the tech sector, the investment period coincided with the dot-com crash. Says Shirley, “In hindsight, it wasn’t a great time to invest in individual companies. But in the next five to six years, we will be out of them and I believe we will end up doing well.”
SURVIVING THE TECH BUBBLE
Unlike other private equity funds that folded during the tech downturn, Fairview wasn’t zapped because its portfolios weren’t heavily weighted in the sector. “The good news from our perspective is that we closed the first such fund [worth $300 million] in late November of 1999,” says Morse. By the end of the first quarter of 2000 — just as the NASDAQ imploded and the tech bubble began to burst — the firm had barely committed $20 million of the fund.
As the technology venture capital space has returned to normal valuations, Fairview has placed millions in the sector. Morse says these investments have “attractive results to date.” Currently, Fairview has significant exposure to technology companies through
four of its nine existing funds. “There are going to be times when alternative investments are slow and then speed up,” explains Morse. “Our job in a lackluster environment is to pinpoint where there are opportunities.”
And Price and Morse will continue to pursue big management assignments like the Constitution Fund — even though Schaefer says that some may speculate that Fairview got Connecticut’s business because it’s a black firm and the state treasurer is African American, or that it won because it is a Connecticut-based business. Says Schaefer, “We had serious competition there, but we got this deal because Fairview Capital has 10 years’ experience in the marketplace and we are best to manage the fund.” And while his and Halligan’s position at Fairview may have also been an asset in acquiring the assignment, he tags Morse and Price as the masterminds. “Larry and JoAnn are really experienced in this arena and they have a real way of bringing out the best in people.”
Shirley, who is also Morse’s former Princeton buddy, is another true believer in the duo’s power. “When Larry asked me to join him, I said, ‘Sure.’ I didn’t ask about money or anything. Larry is one of the best trained minds in the industry,” says Shirley. “JoAnn has the personality that draws people to her and, at the same time, leadership capabilities that are without limit. The combination of Larry and JoAnn leading this firm is just tremendous.”