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Jamie Kempner: Loeb Partners’ Merchant of Banking

Longtime Lazard investment banker Kempner is trying to transform the Loeb family office into a merchant bank.

During the Depression, James (Jamie) Kempner’s great-grandfather, Carl Loeb, founded the brokerage firm that would go on to become Shearson Loeb Rhoades. Today, the Loeb patriarch would recognize what his heir has in mind for the family office that manages the wealth that survives him. After all, Kempner’s idea to transform Loeb Partners Corp. into a merchant bank — which advises and raises capital for private companies as well as invests in them — points to a business that thrived on Wall Street until partnerships like Goldman Sachs & Co. and Morgan Stanley grew into financial supermarkets in the 1980s and started to go public. The merchant bank model withered as partners’ money was transformed into shares of public stock and private equity firms grew and evolved to take on the lion’s share of investing in private companies.

Kempner, who spent 33 years at investment bank Lazard before joining Loeb Partners in January 2014, works alongside his 88-year-old father, Thomas, chairman and CEO of the firm. As president, the younger Kempner is building an investment banking advisory business for middle-market companies. He is also president and Chief operating officer of Loeb Holding Corp., parent company of Loeb Partners.

It’s a good time to refashion the Loeb family business into a merchant bank. Since the financial crisis, regulators around the globe have enacted legislation to prevent banks from taking the types of risks that led to the credit freeze of 2008 and the subsequent market meltdown. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a bevy of rules have reined in banks, including raising the amount of capital that they have to keep on hand to support lending and trading activities. Bank of America, Citigroup, Credit Suisse and JPMorgan Chase & Co. have all sold their private equity arms, leaving opportunities for new entrants like Loeb.

“We focus on advising companies, but we want to be so close to them that we can also invest capital,” says Kempner, 58, from his Wall Street offices. “When you’re wearing a pure adviser hat, you are a little threatening to companies because they think you’re there only to generate fees. But if you’re an adviser and a potential investor, you might be writing a check to them.”

Eager for an example, Kempner plucks a black biomass pellet from a bowl sitting on a table in his office, showing a reporter the product of a clean energy company called American BioCarbon, in which Loeb recently invested after having done advisory work. Philip Keating, who joined Loeb Partners last year, is interim CEO of American BioCarbon (formerly known as NFR BioEnergy), one of several clean energy investments for Loeb.

“Merchant banking isn’t new; it’s the original investment banking model,” says Keating, who spent 20 years doing investment advisory work and debt and equity placement in energy and industrials at several banks, including Lazard, where he met Kempner. “We don’t have institutional trading and we aren’t pushing other products. It’s real advice and opportunistic investing.”

Kempner is capitalizing on the unwinding of a trend that his family helped kick off. In 1931, Carl Loeb founded his eponymous investment bank, which became Loeb, Rhoades & Co. after acquiring a competitor six years later. The firm steadily grew and in 1950, Thomas Kempner joined his grandfather’s investment bank. When banking legend Sanford Weill, head of Shearson Hayden Stone at the time, bought Loeb Rhoades in 1979, the firm became the U.S.’s second-largest investment bank. Shearson Loeb Rhoades, as it was called post-merger, spurred a wave of consolidation and growth among banks that didn’t end until the financial crisis.

Loeb Partners was originally established in 1982 by Thomas Kempner and his uncle, John Loeb, to invest the family’s capital in private deals, including real estate and companies that ranged from start-ups to mature industrial concerns. Loeb also invested in public companies through its own hedge fund, which was wound down last year after its portfolio manager, Gideon King, decided to leave to run his own capital.

Loeb is not the only new entrant to see merchant banking as fertile ground. One of the most well known merchant banks is Chicago-based BDT Capital Partners, run by Byron Trott, the former chairman of investment banking at Goldman Sachs Group and a favorite banker of Warren Buffett.

Kempner, who ran equity capital markets at Lazard and was most recently senior banking adviser for companies in the transportation and logistics industries, believes his merchant banking strategy will be fueled by midsize companies’ desire for an alternative to private equity capital. Family offices like his can stay in deals longer than private equity firms, which need to exit within five to seven years to satisfy pensions and other outside clients. At the same time, private equity firms have increasingly focused on the largest deals, leaving many smaller companies without sufficient access to funding, particularly as bank loans have also dried up for the sector.

Max Winograd, CEO and co-founder of NuLabel Technologies, a Rhode Island start-up focused on sustainable labeling for packages, says he talked to more traditional funders like private equity firms but felt his R&D-focused company would be better served by a family willing to stay in longer. “The packaging industry is synonymous with glacier,” says Winograd. “We’ll require a longer investment than is typical.” He adds that NuLabel benefits from Loeb’s more personalized investment, while at the same time being able to take advantage of the firm’s connections and years of expertise.

Loeb wants to invest alongside other wealthy families in so-called club deals, particularly when it comes to bigger transactions that require large checks to fund. “Some families feel that they can bring more than money to the table,” says M. Said Armutcuoglu, who spent more than a decade at Lazard, where he worked closely with Kempner, before joining Loeb as a managing director in 2009. “They have a good network of business partners, they’re working with good management teams and they want to be more proactive in managing a company.”

Last spring, Loeb advised Norstar Shipping (Asia) Pte on the purchase of two long range tanker ships, bringing in as an equity investor a prominent family office. Loeb offers up due diligence expertise that family offices may not have in-house, as well as deal flow through its advisory business. “A lot of families are tired of paying private equity fees while still having no transparency and just getting word of distributions, quarterly reports and capital calls,” adds Kempner.

Loeb is evaluating investment opportunities, writing initial checks and then asking other families to join in. Although the firm prefers deals where it has control, it has done two recent deals in which it has a minority stake, including an investment in D.E Master Blenders 1753, an Amsterdam-based coffee company. Loeb is focusing on several industry groups: financial services, health care, media, telecommunications and transport and logistics.

With decades under his belt in investment banking, Kempner knows all deals don’t work out as planned. Loeb also has a restructuring group, which until recently hasn’t been particularly busy. Not surprisingly, Kempner expects restructurings to pick up as the high-yield market slows down and companies look to private capital as an alternative. Loeb recently served as investment banker to Infraredx, advising the Burlington, Massachusetts–based cardiovascular imaging company on a corporate restructuring and sale to Japan’s Nipro Corp. last year following an abandoned IPO by Infraredx.

Kempner is bullish on his firm’s prospects. Last year, Loeb Partners hired Randall Haase to run a new portfolio called the Loeb Total Return Fund. Haase, who was most recently a portfolio manager at Baron Capital and a managing director at Stanley Druckenmiller’s Duquesne Capital Management, will make public investments with Loeb money as King once did through his now closed hedge fund. Loeb also formed a partnership with the Landon Family Trust in London, called Loeb Landon Capital Partners, to invest directly in middle-market businesses in the U.S. The capital will come from ultra-high-net-worth U.S. and European family offices.

Although Thomas Kempner has been investing in private companies since he opened his family office almost four decades ago, his son Jamie needs to build the firm’s own long-term track record. At that point, he may open a fund and look for outside capital or seek other families to commit money to Loeb. Says Kempner: “Advisory work leads to investments and that will lead to a track record for my team.” •

Follow Julie Segal on Twitter at @julie_segal.

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