Schwab eyes alternative investments

Charles Schwab Corp. is on the verge of a deal with a San Francisco neighbor that will take alternative investments where they’ve never gone before – within reach of mere millionaires.

If the deal goes through, it will add to an already impressive arsenal of offerings that Schwab makes available to those among its 6,000 independent advisers who cater to wealthy clients.

And it will give Schwab a competitive edge over Wall Street firms such as Merrill Lynch & Co. Inc. and Morgan Stanley Dean Witter & Co.

InvestmentNews learned of the deal last week, and Schwab as well as its prospective partner, Scudder Weisel Capital LLC, confirmed that an agreement is all but set.

Scudder Weisel is a joint venture launched in December by Thomas Weisel Partners and Zurich Scudder Investments.

“We’re in late-stage discussions with Charles Schwab to offer the Scudder Weisel Entrepreneurs Fund on their adviser platform,” says Erich P. Gerth, Scudder Weisel’s chief of sales.

leapfrogging competitors

Scudder Weisel executives say Schwab could be the first company to roll out the financial products in scale.

By using top institutional managers and low minimum investments, Scudder Weisel believes Schwab can leapfrog the alternative-investment offerings available from advisers at the big Wall Street houses.

It is also another carrot Schwab can dangle to lure brokers into detaching themselves from Wall Street. Schwab recently announced a venture with Callan Associates Inc. in San Francisco, another institutional all-star. Callan’s involvement allows Schwab to offer separate-account management backed by pension-grade research.

Meanwhile, Schwab customers already have access to big-league trust services through U.S. Trust Corp.

“It’s the movement from fees to wealth management,” says Chip Roame, managing principal with Tiburon (Calif.) Strategic Advisors. “I’m impressed to hear they’re bringing it down market. It’s the next level.”

Schwab will hardly be an exclusive distributor of the products. Linsco/Private Ledger of Boston, SunAmerica of Los Angeles and National Financial Partners of New York all have access to Scudder Weisel investments through the 70-person sales force that Zurich Scudder Investments in New York has formed to distribute the products.

Though alternative investments are grabbing headlines, Scudder Weisel is one of the first companies to design its products so they appeal to independent advisers.

The minimum investment is $25,000, though investors must show a net worth of $1.5 million. Technology represents only about 20% of the allocation in Scudder Weisel’s Entrepreneurs Fund – unusual for that class of assets.

And the funds are almost evenly split between private-equity investments and hedge investing, which gives investors a fighting chance to make money in bear markets.

But the real difference is the quality of the investments, according to Boyd W. Fellows, 40, CEO of Scudder Weisel Capital and a partner with Thomas Weisel Partners, also of San Francisco.

“When you get into sophisticated products, the quality of the manager is No. 1,” he says.

That’s because the returns of the best and worst in hedge fund and venture fund managers are of a greater order of magnitude than those of conventional mutual fund managers.

“Schwab has a very good history of getting the best of the best,” Mr. Roame says. “They have a very open architecture.”

smell of newness

Scudder Weisel’s first fund offering is submanaged by Whitney Holdings LLC of Greenwich, Conn., a superstar in the institutional world. That firm previously never allowed investors to ante up less than $5 million.

The nascence of this investment offering is indicated by the look of Scudder Weisel’s top-floor suite at 88 Kearny Street. The smell of new furniture and fresh paint hits a visitor entering the lobby.

With the promise of gilt-edge innovation, Scudder Weisel is cutting a wide swath through the ranks of the investing world. The company has picked off a coterie of executives from other elite investment companies.

Mr. Gerth was a vice president with Goldman Sachs & Co. and Morgan Stanley’s asset management division.

Bill Santos, Scudder Weisel’s chief customer officer, was at the top of Dreyfus’ sales department and held management positions at Fidelity Investments and Bear Stearns & Co. Inc.

Scudder Weisel has even snagged reporters away from TheStreet.com Inc. to write synopses of Thomas Weisel research for a website available to advisers.

Peter Mattoon, 39, who came from Zurich Scudder to serve as Scudder Weisel’s president, says the time was ripe to create a company such as Scudder Weisel because of a “confluence of factors.” There is a growing public awareness that alternative investments in the hands of the best managers outperform traditional investments.

But nobody ever wanted to tackle the administrative task of luring thousands of retail investors into deals that are typically oversubscribed. Scudder Weisel uses a little-known financial structure known as a closed-end interval fund to make it work.

qualified to invest

Also, with stakes in technology ventures selling for about 80% less than they did a year ago, the demand for cash from those companies has never been higher, and the opportunities for high returns are excellent.

Nearly 8 million households in the United States, with a combined net worth of $12 trillion, are qualified to invest in Scudder Weisel’s investments, according to the company.

So will there be a trail of copycat efforts to follow Scudder Weisel into this hot field?

Mr. Roame says that’s not likely because Thomas Weisel Partners holds a unique position in the market to make its new venture succeed.

Companies that have a seat at the table for private deals that occur before the initial public offering have a real advantage, he says. “There are only a handful of doors to get to those seats.”