WHO WANTS FUNDS WITH $70 MILLION-A-MONTH OUTFLOWS? ROBERTSON STEPHENS DEAL COULD BE CLEARANCE SALE

BankAmerica Corp. last week whittled down the number of serious bidders for its Robertson Stephens money management unit to a handful. But a host of uncertainties could complicate efforts to sell the high-octane property.

The San Francisco-based asset management unit known as Robertson Stephens Investment Management Co. has built a reputation for assembling a stable of highly regarded — and well-publicized — portfolio managers. But recent disappointing investment results have raised concern over how much effort will be needed to turn the firm’s fortunes around.

a complicated business

Investors in Robertson Stephens’ rapidly shrinking $2.2 billion group of mutual funds are yanking out money at a rate of $70 million a month — nearly triple the $24 million average monthly pace the firm endured last year, according to Boston’s Financial Research Corp. In fact, only two of the firm’s 12 mutual funds — Emerging Growth and MicroCap Growth — have taken in more money than they returned for the first five months of this year.

The firm is also dressing up the profitability of its funds with a plan to merge its $6.1 million Global Low-Priced Stock Fund and $15.3 million Developing Countries Fund into its $150 million Partners Fund.

And though the money management unit has built up a profitable $1 billion-plus hedge and venture capital fund business, the unpredictable earnings of such businesses further muddies potential buyers’ valuation process.

“They don’t have the hot hand today that they had in the past,” observes Andrew Guillette, a consultant with Cerulli Associates in Boston.

“Continuing outflows are a concern, but they don’t make this a fire-sale situation,” Mr. Guillette adds. “Robertson Stephens is still a well-known boutique company that would be an attractive addition for many firms.”

Also complicating matters: CEO G. Randy Hecht and other senior managers are looking for a sizable ownership stake, according to sources. Some observers suggest the best outcome for the money management business would be a management-led buyout.

Indeed, such a transaction remains a possibility because both parent and unit have separate investment bankers — San Francisco-based Putnam Lovell de Guardiola and Thornton representing Mr. Hecht and his managers, and New York’s Goldman Sachs & Co. advising BankAmerica (which decided to sell Robertson Stephens in preparation for a pending merger with NationsBank Corp.).

In addition to Robertson Stephens’s $2.2 billion no-load mutual fund business, the unit manages $2 billion in institutional and private accounts and $1.5 billion in hedge, venture capital and real estate funds.

The firm’s $1 billion-plus hedge fund and venture capital business likely is highly attractive to banks or traditional mutual fund firms looking to expand their product offerings. However, hedge and venture capital firms are usually owned by their managers and rarely change hands, making them difficult to value.

“It’s much different than a standard money management business,” says Steven Galante, publisher of the Private Equity Analyst, a Wellesley, Mass.-based newsletter. “They not only have the management fee, but the incentive fee, which is presumably the biggest value and yet it’s also the most unknown factor.”

For example, most hedge fund managers charge an annual 1% fee for assets under management and keep 20% of annual profits. Robertson Stephens runs an estimated $800 million in hedge funds, according to a source who has reviewed the sale offering documents. The firm collects only $8 million in base fees on the funds; however, its annual incentive fees can vary dramatically.

Robertson Stephens won’t comment on the performance of its hedge funds. But one can get a sense of the dramatic profit swings of its hedge funds by considering the performance of co-founder Paul Stephens, who runs Robertson Stephens’ $316 million Contrarian Fund and also runs a hedge fund.

hedge fund biz hard to value

Last year, Contrarian recorded a 29.5% loss. If Mr. Stephens’s hedge fund posted similar results, the fund would have collected just 1%, or $3.2 million, on $316 million in assets, but Contrarian returned 21.7% in 1996. Under a hedge fund fee structure, Robertson Stephens would have collected the $3.2 million base fee, plus 20% of the fund’s $68 million gain — or nearly $14 million in additional fees.

Compounding the volatile revenue stream of hedge and venture capital funds is the fact that the incentive fee is almost entirely dependent on the skills of the managers in the organization. “If an organization is being sold there is always the risk that the managers will leave and suddenly the value of the incentive revenues becomes highly uncertain,” says Mr. Galante. “So putting a value on that is extremely difficult.”

will key managers stay?

A Robertson Stephens spokeswoman says all of the firm’s managers intend to remain. But three potential suitors, who requested anonymity, say significant questions remain over whether key managers will commit to staying.

For example, manager John Wallace is said to be frustrated and looking to leave. Wallace runs $660 million in two mutual funds — $273 million Growth & Income and $83 million Diversified Growth — and subadvises four variable annuity accounts for several insurers.

“I have not been testing the waters or actively looking for a new home,” Mr. Wallace responds. “We are in negotiations with several potential buyers and I’m optimistic that things can work out great for everybody.”

Yet some industry executives wonder how committed the firm’s top managers will be after they collect their share of $295 million in “golden handcuff” payments which were due to be paid over four years following BankAmerica’s acquisition of Robertson Stephens last October.

The firm’s investment banking executives became eligible to collect their retention payouts when BankAmerica reached an agreement to sell Robertson’s investment banking operations to BankBoston Corp. in May. A sale of Robertson Stephens Investment Management would trigger similar payouts to Mr. Hecht and his managers.

According to the BankAmerica sale offering, the bank is requesting $55 million in cash for itself. The balance — cash, equity options or phantom stock — would go to the money management unit’s key principals.

Based on estimated pretax profit of $10 million, analysts figure the firm will be valued at around $100 million — perhaps more, if an acquirer could consolidate operations and cut costs.

Tough sell?

Robertson Stephens Investment Management Co. is on the block at a time when investors are yanking money from many of its key funds.

YTD YTD 3 year Flows

Fund Assets Return Flows Return since 12/95

Value+Growth $705.3M 18.2% ($127.3M) 16.0% ($658.9M)

Contrarian $316.7 (9.2%) ($80.1) (5.2%) ($66.2)

Emerging Growth $280.3 20.7% $5.9 26.2% $33.7

Growth & Income $273.8 7.8% ($49.9) 22.8%* $23.1

S&P 500 17.7% 30.2%

Performance data, with annualized three-year returns, are through June 30; net assets and net cash flow estimates are through May 31.

*Since inception 7/12/95.

Sources: Morningstar Inc., Financial Research Corp.