RLH Taps Riordan Supporters in New Growth Strategy

In the six years since he left the leveraged buyout business to become mayor of Los Angeles, Richard Riordan has refused all but $1 a year of his city-paid salary. Yet he’s still made a fortune.

His financial health owes in part to the fact that he remains a limited partner in Riordan, Lewis & Haden, the investment firm he founded in 1981. Since Riordan took office, the firm said, it has earned him in excess of $100 million.

Now, as Riordan’s administration enters its twilight, his firm is opening its doors for the first time to major outside investors in a bid to expand its investment war chest by more than $120 million--with help from some of the city’s wealthiest power brokers.

Tucked in the back of the 29th-floor office suite of the mayor’s former law firm in downtown, RLH consists of just six people and makes perhaps one investment per year.

Indeed, over its 18-year history, it has developed a reputation as a boutique backed by--and answering to--just one big investor: Riordan, a multimillionaire who could afford to wait years before seeing substantial returns.

Such buyout firms typically invest in young, private companies with the goal of eventually taking them public at a huge profit.

But recently, as rivals backed by pension funds and other institutions threatened to muscle RLH out of some lucrative deals, the partners discovered that Riordan’s considerable checkbook was no longer enough.

RLH cast about in search of more money and found it in part by tapping longtime Riordan supporters in political, corporate and charitable circles for what it expects to be a $100-million-plus cash infusion.

Over the last year, RLH has added as limited partners Sun-America Inc., chaired by billionaire Eli Broad; Pacific Life Insurance Co.; and Transamerica Occidental Life Insurance Co. By next summer, the firm said it expects to enlist enough limited partners to lift its total available capital to $150 million to $200 million.

In the mid-1990s, RLH reached outside on a smaller scale, by creating a “CEO fund,” in which 18 local executives including Broad, Korn/Ferry International Chairman Richard M. Ferry and Avery Dennison Corp. Chairman Charles Miller contributed their networking skills, business advice and cash (less than $5 million so far).

*

For his part, Riordan said he had no involvement in bringing the CEOs or institutional investors aboard. Rather, he attributed RLH’s ability to attract new money to the connections of general partner J. Christopher Lewis, a well-known player in Los Angeles’ venture capital networks. But the mayor said the fact that the list of new investors includes some of his friends and associates “doesn’t surprise me.”

RLH’s quest for fresh funds and outside advice since Riordan took office has two results: It adds a financial glue to the political bonds Riordan has formed with the city’s key executives, and it signals a seismic shift for RLH’s partners.

With the arrival of outside partners, RLH’s own piece of the new capital structure will be smaller--about $25 million out of the expected $150 million or so, said Lewis, who has been with the firm since its formation.

That means the partners, for the first time, face the prospect of delivering returns for large institutional investors--some of whom may have less patience than the mayor.

“Because traditionally we haven’t had other people’s money, we don’t flip investments very quickly,” said Patrick Haden, a general partner with the firm since 1987. “Maybe we want to have our cake and eat it too, [but] we want to make sure we keep the investing discipline we currently have.”

Haden said the firm has $60 million working in 12 companies, nearly all in Southern California.

When Riordan was its primary benefactor, RLH passed on quick-turnaround deals. Haden said the firm has held shares of at least two of its companies, Airdrome Parts Co. and PIA Merchandising Co., for more than a decade.

And its patience has paid off in above-average performance. Since 1984, Haden said, RLH has earned net annualized returns of 28%. By comparison, the average private equity fund earned 15.1% a year over that stretch, according to Venture Economics, a research firm.

RLH’s recent performance, Haden noted, is even more likely to draw interest--and pressure--from big investors. He said that since 1993, when Riordan took office and the partners started focusing on “high-end” service-industry firms, RLH has earned net returns of 55% a year--more than quadruple the 13.1% private-fund average.

Despite its high returns, RLH has stayed out of the headlines. In part, that’s because the lion’s share of venture capital dollars are flowing into Silicon Valley start-up firms. RLH, in contrast, has bet on decidedly low-tech firms, from an education-oriented retailer to a plastics distributor.

But the firm’s absence from the spotlight also has been deliberate. With its chief financier holding elected office, RLH has had to screen out deals that could come back to embarrass Riordan--such as investments in firms that might do business with the city or the Metropolitan Transportation Authority, where Riordan is a board member.

“We have had to keep sort of a low profile over the last six years,” said Haden, a Rhodes scholar and former Los Angeles Rams quarterback. “That may have hurt us some.”

RLH’s investments have landed the mayor in an awkward position at least once. In 1994, the mayor sold his $9.7 million worth of stock in Tetra Tech Inc. after it was revealed that he had voted in MTA budget meetings for a rail project that meant hundreds of thousands of dollars for the Pasadena engineering firm. A state ethics panel ultimately concluded that Riordan didn’t know his MTA vote would affect Tetra.

Records also show that the L.A. Parks and Recreation Department awarded a dairy contract to Adohr Farms Inc. in 1995 while RLH held a stake in it. But there is no indication Riordan had a role in the award. The mayor later sold his interest in the dairy and made about $17 million on the deal, his disclosure forms show.

Riordan has tried to avoid conflicts by placing his assets in a blind trust administered by RLH partner Lewis. Such trusts exist to prevent officeholders from knowing how their money is invested. But Riordan knows about at least half of RLH’s holdings, Lewis said, because the investments either predate his political career or have been disclosed in regulatory filings.

Although investment firms such as RLH usually generate handsome returns on any company they take public because their own shares in the business often cost them mere pennies per share, such companies meet with mixed results once public.

Perhaps RLH’s biggest recent success was Data Processing Resources Corp., an Irvine staffing firm supplying computer specialists to major corporations. When the company’s co-founder, Mary Ellen Weaver, wanted to buy out her partner and expand the firm in 1995, she acted on another executive’s advice and went to RLH. The partners offered about $5 million and helped refinance the firm, taking a 32.5% stake.

Since 1995, Data Processing’s annual sales have soared from $50 million to $211 million. It made an initial public stock offering and saw the stock double. In June the firm sold itself to a Michigan firm for about $353 million.

Riordan’s share of the initial $5-million investment was worth $26.5 million at the end of 1998, according to disclosure forms filed with the city.

*

Data Processing’s public performance contrasts with that of SM&A; Corp., a Newport Beach-based consulting firm in which RLH invested $5 million in 1996. SM&A; went public at $12 a share in 1998, and the price rose as high as $32.75. But the shares have since plummeted to $7.56 as of Friday.

The company recently had to liquidate its money-losing networking equipment resale arm after a deal to sell the unit fell through.

Haden said SM&A;, which advises companies on how to get government contracts, “is a very unique company that hasn’t been appreciated by Wall Street. We still have every bit of confidence.

“We’re in no general rush to get our money back,” Haden said of RLH’s investments. “We hope some of the companies in our portfolio will go public. Nothing’s going to happen tomorrow.”

But whether RLH can wait for such investments to pay off as it takes responsibility for a hoard of new institutional dollars remains to be seen.

*

Times staff writer Jeff Leeds can be reached at jeff.leeds@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tracking the Deals

A look at initial public stock offerings planned by California companies. For more information on upcoming deals, contact the companies or the underwriters. Note: Most of the companies and underwriters have Web sites you can visit.

Company: Tumbleweed

Ticker symbol: TMWD

Size, in millions: $52

Est. share price: $12-14

Underwriter: CS First Boston

Est. week: 7/26

*

Company: Quokka Sports

Ticker symbol: QKKA

Size, in millions: $50

Est. share price: $9-11

Underwriter: Merrill Lynch

Est. week: 7/26

*

Company: Pacific Comm.

Ticker symbol: PCBG

Size, in millions: $58

Est. share price: $15-16

Underwriter: Sutro

Est. week: 7/26

*

Company: Continuus Soft.

Ticker symbol: CNSW

Size, in millions: $28

Est. share price: $8-10

Underwriter: U.S. Bancorp Piper

Est. week: 7/26

*

Company: Liberate Tech

Ticker symbol: LIBRT

Size, in millions: $75

Est. share price: $11-13

Underwriter: CS First Boston

Est. week: 7/26

*

Company: Accrue Software

Ticker symbol: ACRU

Size, in millions: $35

Est. share price: $8-10

Underwriter: BancBoston RS

Est. week: 7/26

*

Company: Takes.com

Ticker symbol: TAKE

Size, in millions: $23

Est. share price: $7-9

Underwriter: Paradise Valley

Est. week: 7/26

*

Company: Net IQ

Ticker symbol: NTIQ

Size, in millions: $36

Est. share price: $11-13

Underwriter: CS First Boston

Est. week: 7/26

*

Company: Packeteer

Ticker symbol: PKTR

Size, in millions: $44

Est. share price: $10-12

Underwriter: BancBoston RS

Est. week: 7/26

NA= not available

Source: IPO Financial Network (https://www.ipofinancial.com), Bloomberg News